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Why Investors Are Wrong About Applied Optoelectronics Inc (AAOI) Stock

The company's lowered guidance for the current quarter didn't merit the 40% bath shares took as a result

By James Brumley, InvestorPlace Feature Writer

A couple of weeks ago, yours truly suggested it would be mostly pointless to sue Applied Optoelectronics Inc (NASDAQ:AAOI) simply because of the sizeable and unexpected drop in the value of AAOI stock. Shares have fallen 38% since the AAOI earnings report from early August, which was better than expected, but also cautioned investors that a major customer — most likely, Inc. (NASDAQ:AMZN) — was taking some of its business elsewhere.

Why Investors Are Wrong About Applied Optoelectronics Inc (AAOI) Stock
Source: Shutterstock

I’m sticking to that argument.

The odds of being compensated anything are slim enough, and the odds of your loss being fully offset are even slimmer. Though other owners of AAOI stock will most definitely follow through and participate in the class action suit, at least you can take some comfort in knowing you didn’t needlessly add to Applied Optoelectronics’ headache.

I’d like to move the discussion forward today, beyond the brewing lawsuit, and suggest to everyone that perhaps the best way to recoup your losses on your AAOI stock is simply to be patient and let the company do what it’s already proven it can do very well.

Perspective Please

The short version of a long story (on the off chance anyone reading this doesn’t already know about the damning AAOI news from early August): Applied Optoelectronics makes, among other things, optical transceivers — a piece of hardware that facilitates high-speed communications within a data center’s servers. 40G transceivers were considered high-performance hardware a few years ago, but 100G transceivers have become the new standard. Problem is, Applied Optoelectronics didn’t ramp up its capacity to supply 100G hardware fast enough, forcing Amazon (or so it is widely believed) to take at least the better part of its 100G business to another supplier. That “other supplier” is believed to be Fabrinet (NYSE:FN).

It’s a problem simply because sales of transceivers to Amazon is a significant piece of Applied Optoelectronics’ pie. We don’t know exactly how much, but we do know the loss of this business to Fabrinet forced AAOI to lower its revenue outlook for the current quarter to a range of $107 million to $115 million. Analysts were modeling a top line of $123 million for the third quarter of this year.

Calling a spade a spade, Applied Optoelectronics botched it. Part of remaining competitive is anticipating business needs and staying ahead of your competition. This company didn’t do that, and one can’t help but wonder of it’s failed to do so on other technology fronts as well. Just for a little perspective though, the mid-point of the new Q3 guidance range is just 10% less than the analyst consensus, and the stock was at one point down more than 40% following the dire AAOI news.

The punishment doesn’t fit the crime. In fact, the punishment far exceeds the crime. The end result is a stock that’s now trading at a plausible forward-looking P/E ratio of only 10.8.

Yes, there’s risk involved. The “where there’s smoke there’s fire” adage applies to companies too. I’m willing to bet, however, this particular gaffe is one that Applied Optoelectronics doesn’t stumble into again. I’m willing to bet the organization’s top brass and engineers are doing everything conceivable to avoid dropping another bomb on AAOI stockholders like the one they had to drop on them a couple of months ago.

There’s nothing better for a company’s performance than a little fear.

Bottom Line on AAOI Stock

The irony is, even without the tacit, unintended message sent by Amazon to Applied Optoelectronics shareholders, the company was beefing up its capacity to produce 100G equipment anyway… albeit after its competitors did.

It wasn’t going to be out of the market for long, though.

It’s also crucial to understand that Applied Optoelectronics offers everything from transceivers to CATV equipment to analog diplexers to photodetectors and more. Its other goods are still plenty competitive. For whatever reason, though, traders took the 100G ball and ran with it, without fully realizing they didn’t need to run that far. Here’s a look at what analysts see for the company’s fiscal future, which is still pretty impressive.

Applied Optoelectronics (AAOI) results, outlook

And just for the record, the company has had something of a history of topping expectations.

Point being, you could certainly do a lot worse than owning AAOI. It’s a far better bet than the class action lawsuit being prepped by disgruntled shareholders.

As of this writing, James Brumley did not hold a position in any of the aforementioned securities. You can follow him on Twitter.

Article printed from InvestorPlace Media,

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