Applied Optoelectronics Inc (NASDAQ:AAOI) is up 175% since 2017 started. That’s certainly very impressive and it’s no surprise that a leading supplier of fiber optic networking product provider is doing well as mobile and fixed wire media compete for consumers.
What is surprising is the near 40% drop in AAOI stock’s price in the past couple weeks. Some are now wondering whether AAOI isn’t worth the hype it has been living on for the past year.
On the one hand, AT&T Inc (NYSE:T), Verizon Communications Inc. (NYSE:VZ), T-Mobile US Inc (NASDAQ:TMUS) and others are spending billions to get the fastest networks with the best bandwidth to market ahead of the competition. TMUS just announced it’s spending $8 billion this year to upgrade its mobile network to speeds and coverage that will rival both T and VZ.
The cable companies are also racing to grow their businesses, as are the satellite providers.
And this doesn’t even take into account the massive demand that is coming from all the players in the cloud computing space, including Microsoft Corporation (NASDAQ: MSFT) and Amazon.com Inc (NASDAQ: AMZN).
This is a boom time for a company like AAOI that is building the next generation equipment to allow companies to access higher speeds and greater bandwidth.
Regardless of whether the Federal Communications Commission scraps the current net neutrality rules, no internet service provider is going to stop looking for more speed, especially if they can charge more for it.
AAOI reported earnings Aug. 3 and smashed earnings expectations (Street estimate was $1.32 a share and AAOI posted $1.54). It also beat on revenue, which was up 112% year over year. Yet, the stock sold off almost 30% on that day alone because AAOI lowered guidance for the rest of the year.
What This Means for AAOI Stock
With a stock that had been soaring for the past 12 months — up 360% — there are bound to be a growing number of short positions. When the stock rises, the shorts get squeezed and the stock vaults higher. But when the stock falters it gets hammered on the way down.
That’s where we are with AAOI right now.
The question is, are the shorts are right or are the long buyers right? I’m in the latter camp.
There are two “problems” that AAOI is dealing with right now. First, demand is outstripping its supply of transceivers. And second, there is currently a transition from older 40 gigabit transceivers to the new 100 gigabit transceivers. As companies switch over, there can be a lag in sales, like we’re seeing now.
Let the short sellers have their day. The long-term belongs to AAOI.
Louis Navellier is a renowned growth investor. He is the editor of five investing newsletters: Blue Chip Growth, Emerging Growth, Ultimate Growth, Family Trust and Platinum Growth. His most popular service, Blue Chip Growth, has a track record of beating the market 3:1 over the last 14 years. He uses a combination of quantitative and fundamental analysis to identify market-beating stocks. Mr. Navellier has made his proven formula accessible to investors via his free, online stock rating tool, PortfolioGrader.com. Louis Navellier may hold some of the aforementioned securities in one or more of his newsletters.