Investors can choose to believe in Applied Optoelectronics Inc (NASDAQ:AAOI). But if you’re like me and have trouble letting bygones be bygones, an out-of-the-money bull call spread in lieu of AAOI stock looks like a nice compromise. Let me explain.
Following an October gaffe by Applied Optoelectronics management and collective gasp from AAOI bulls, last week’s pre-warned Q3 earnings report was apparently pleasing to investors.
Revenue of $88.9 million came in within October’s forecast of $88 million to $89 million and profits topped out at $1.08 compared to an estimated range of $1.04- to $1.09-per-share.
But while AAOI stock has surged nearly 20% in the report’s aftermath, shares are still off by roughly 23% prior to October’s fallout. The warning was a result of Applied Optoelectronics having a couple large and lucrative eggs in one basket, accounting for nearly 75% of AAOI’s data center sales — and ‘unexpectedly’ seeing drastically lower demand from one of those customers: Amazon.com, Inc. (NASDAQ:AMZN).
Now it appears investors are trying to put the incident behind the company and regroup with an eye on still strong-looking growth potential. For its part, management stated it believes the inventory issues with its large, but undisclosed customer (universally accepted as being Amazon based on filings this year), will be back on track in the first half of 2018.
The question is, should Applied Optoelectronics be trusted and investors accept October’s warning as a one-off incident? Some concerns have been raised that the company had to know or should have realized there were problems before it reduced guidance in October. If so, this goes to the heart of issues regarding the potential integrity and/or competency of management.
AAOI Weekly Stock Chart
To say AAOI stock enjoyed a nice weekly performance is an understatement. But AAOI could potentially move much higher based on a very unfriendly trend to bulls in recent months; and if investors are up to the task of letting bygones be bygones.
Bottom-line, a deep corrective move of around 65% and engulfing bullish candlestick that’s reclaiming the 62% retracement level from an oversold stochastics position looks promising for continued upside.
Adding further support, the daily perspective, which sports a large price gap from about $50 to $58 and tied to October’s warning, makes AAOI stock even more enticing as it’s not too far from current prices and could cause a fast and powerful upside reaction.
AAOI Stock Bullish OTM Call Spread
For investors that are bullish given the circumstances presented, an out-of-the-money vertical, which vastly reduces and limits risk is a favored play. Reviewing Applied Optoelectronics options, the Dec $50 / $55 bull call spread is attractively priced. With shares of AAOI at $45.30 the vertical trades for $1.00.
The absolute risk with this bullish spread is contained to just over 2% stock risk and it allows for a max profit capture of 400% or $4.00 above $55. That’s another 22% from current prices, which might sound like a lot. However, as the target is still within the gap area, 47% removed from this summer’s high of $103.41 and a couple dollars below the 200-day simple moving average, those are some good reasons to believe without being too faithful.
Disclosure: Investment accounts under Christopher Tyler’s management do not currently own positions in any of the securities or their derivatives mentioned in this article. The information offered is based upon Christopher Tyler’s observations and strictly intended for educational purposes only; the use of which is the responsibility of the individual. For additional market insights and related musings, follow Chris on Twitter @Options_CAT and StockTwits.
