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Why Applied Optoelectronics Inc (AAOI) Stock Can Make a Comeback

The deceleration in AAOI stock growth is likely temporary.

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Applied Optoelectronics Inc (NASDAQ:AAOI) is a classic case of a hyper growth company that hits the wall. During August, the company reported disappointing earnings, with the guidance calling for a 5% drop in revenues for Q3. By comparison, the prior quarter saw a 112% spike on the top-line and a 22% quarter-over-quarter ramp!

AAOI stock
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As a result, AAOI stock plunged on the news, dropping by more than a third. Since then things haven’t gotten much better. Yet this is not surprising. It can take some time for a stock market darling to get back on track.

OK, then what should investors do with AAOI stock? Well, if you have a long-term approach, the shares do look interesting.

So here’s a backgrounder on the company: Founded over 20 years ago, AAOI is a top provider of fiber-optic networking systems that are focused on growth markets like cable television broadband (CATV), fiber-to-the-home (FTTH) and data centers. A unique part of the company’s technology is something called the Molecular Beam Epitaxy (MBE) fabrication process, which has allowed for high-performance systems. This is something that has attracted top-notch customers like Amazon.com, Inc. (NASDAQ:AMZN), Microsoft Corporation (NASDAQ:MSFT) and Baidu Inc (ADR) (NASDAQ:BIDU).

So then why is AAOI having problems? There are actually multiple issues at work. First of all, AAOI has faced headwinds in the Chinese market. Granted, AAOI does not have heavy exposure. But even a small deceleration can make a high-growth company stumble.

Another problem for AAOI stock has been that the company is undergoing a transition in its product line, from 40G to 100G systems. This has been challenging since the sales cycles are long in the industry. It also does not help that the slowdown has been worse than expected for 40G systems.

And finally, AAOI has reliance on a handful of customers. According to the latest SEC filing, about 97% of revenues come from only ten customers. In fact, AMZN’s share is roughly 55% and MSFT’s is at 18%.

In light of this, it is understandable that Wall Street has gotten spooked with AAOI stock because of the buzz that AMZN is looking to shift some of its business to alternative vendors.

No Need To Panic About AAOI Stock

While AAOI must deal with some tough problems, there are still silver linings. For example, the transition from 40G to 100G systems is a testament to the company’s ongoing innovation of the product line.

More important, the 100G offerings are likely to see long-term growth because of the heavy demand for hyperscale cloud buildouts. It is also important to note that this technology has higher margins?

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Article printed from InvestorPlace Media, https://investorplace.com/2017/10/aaoi-stock-can-comeback/.

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