Applied Optoelectronics — NASDAQ:AAOI

About Applied Optoelectronics

Applied Optoelectronics, Inc. designs, develops and manufactures optical devices, packaged optical components, optical subsystems, laser transmitters, and fiber optic transceivers. It manufactures optical devices, including laser diodes, photodiodes, related modules and circuitry and equipment for applications in fiber-to-the-home, cable television, point to point communications and wireless.

The company provides its products for three networking end-markets: internet data center, cable television and fiber-to-the-home. Applied Optoelectronics was founded by Chih-Hsiang Lin on February 28, 1997 and is headquartered in Sugar Land, TX.

$28.19
Entry Price
$32.39
Share Price
+15%
Trade Return
519
Trade age — days

Overview

AAOI manufactures fiber-optic network products for the internet datacenter, cable broadband, fiber-to-the-home and telecom markets.

The company has growing market share with high quality producs. With the capability to manufactyure lasers internally, ensures high margins and cost competitiveness in a rapidly growing industry.

The industry will be transitioning to 100G lasers in 2017, providing AAOI an opportunity to further take advantage of it’s strong market position.

Growth Drivers

  • Large expansion in datacenter growth globally - particularly with Amazon as a client
  • New products (100G) to increase market share and margin
  • Natural margin growth with increased revenue

Risks

  • Cyclical business which may see a downturn in the coming years

Valuation Metrics

Earnings is growing strongly as shown with the most recent quarters EPS:

0.04 / 0.16 / 0.38 / 0.50 (forecast)

Q3 2016 revenue was up 23% showing strong growth, with company forecasting EPS of $0.46 - $0.51. Expect the company to again beat guidance due to strong underlying sector growth.

Expect forecast FY EPS of $2.00 minimum putting the company on a forward PE of 14. Given growth prospects a PE of 30 seems appropriate, giving a valuation of $60.40 and a return of 100%.

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Stock notes

24 Feb 2017

Q4 2016 results beat guidance

Outstanding results, this has a long way to run yet. We are now forecasting full year earnings of $3.50 - $4.00

On todays close of $46.27 that is a PE = 12 at the mid-point. Considering the company is growing EPS at > 30% pa, which has accellerated in recent quarters, AAOI could have another 150% - 200% growth from here.

Key highlights for Q4:

  • Total revenue of $85m up 60% YoY
  • EPS $0.84 (up almost 400% YoY and up 120% QoQ)

Key highlights for 2016:

  • Total revenue up 37%
  • EPS up 34%

Forecast for Q1 2017:

  • Revenue of $87 - $91m
  • EPS $0.88
01 May 2017

Q1 2017 results beat guidance - again

The growth seen in the previous quarter has continued with serious strength. Again, expect this to push AAOI higher in the short-term and provides a solid base for longer term growth.

Revising forward EPS to be $4.50, which on todays price of $50.18 is PE=11. Retain position that AAOI could have another 150% - 200% growth from here.

Forecast for Q2 2017:

  • EPS of $1.09 to $1.19
  • Revenue in the range of $106 million to $112 million

Key highlights of Q1:

  • EPS of $1.10 - above guidance of $0.88 / compared with loss of $0.04 YoY
  • Revenue $96.2m - up 91% YoY
17 Jul 2017

Q2 2017 results to exceed guidance

AAOI is like a broken record. Once again management has issued a press release pre-earnings to announce ther quarter’s results will exceed management’s guidance. See press release.

Previous guidance was Non-GAAP EPS $1.09 - $1.19, which has now been upgraded to $1.31 to $1.36, an increase of 14% above the top end of guidance!

AAOI’s growth continues to defy even the most bullish of expectations. This is a stock you simply buy and put in your back pocket.

Lets recap the last 4 quarters of earnings:

  • Q2 2016 (forecast) $1.31 - $1.36
  • Q1 2016 $1.10
  • Q4 2016 $0.84
  • Q3 2016 $0.38

The growth is an astounding 357% of earnings over 12 months.

AAOI’s trailing 12 months earnings is $3.68, which on todays close of $84.20 is a PE ratio of 22.

If you take a very conservative approach and assume earnings will remain at $1.36 for the next 12 months, that provides a forecast 12 month EPS of $5.44, putting AAOI on a forward PE ratio of 15.5

It’s hard to see AAOI not hitting $100 in the coming months.

07 Aug 2017

AAOI sees temporary softness in Q3 with strong recovery in Q4

AAOI preannounced earnings up to $1.36 for the quarter, and has now reported earnings of $1.54. However the company has forecast softness next quarter causing the share price to drop over 30%.

We see this as a strong opportunity to buy AAOI at a large discount

The company has clearly explained the softness is temporary, caused by the transition from 40G lasers to 100G lasers for one of its largest customers. The company’s outlook for Q3 points to EPS $1.30 - $1.43, which is still a 30% sequential increase from the original low end estimate for this quarter.

The outlook into Q4 looks very strong with the company expecting sequential growth on Q3 and aiming to increase inventory levels. The company also expects strong demand in Q1 and Q2 next year from key customer(s).

We conservatively expect forward 12m EPS to be $6.50 with a PE of 20 reasonable given the strong growth, giving a price target of $130. This is an increase of 101% over the current price.

Re-iterate strong buy

Q3 outlook:

  • $107m - $115m
  • Non-GAAP gross margin 43.0% - 44.5%
  • Non-GAAP EPS $1.30 - $1.43

Q4 outlook:

  • Sequential growth on Q3

Key points from conference call:

  • Softer than expected demand for our 40G solutions with one of our large customers that will offset the sequential growth and increased demand we expect in 100G
  • Expanding capacity 70% to 1m lasers / month
  • 57% of our data center revenue was derived from our 40G data center products
  • 39% of our data center revenue was from our 100G
  • Expect 100G to continue to grow as a percent of our data center revenue and to exceed 40G sales in late Q3 or early Q4 of this year
  • Have received initial orders for qualification with the new OEM customer for our next-generation 200G product
  • Expect to begin 200G qualification tested with 3 other OEM customers and one hyperscale customer this quarter
  • In total, we have 14 new active qualification efforts for our 100G and 200G technologies with customers outside of our core hyperscale customer base
  • Had 2, 10% or greater customers in the data center business that contributed 47% and 27% of total revenue, respectively. Additionally, our third largest data center customer contributed approximately 9% of total revenue in Q2, an increase of 83% sequentially
  • Continue to expect to have 3 hyperscale customers, each represent more than 10% of our revenue for the full year 2017
  • Expect our gross margins to remain in the range of 41% to 45%, even in a price-sensitive market and as planned pricing reductions take effect in Q3
  • Compared to Q2 of last year, we have been able to reduce the manufacturing cost to produce our 100G transceivers by over 46%
  • Currently expect to deliver sequential revenue growth in the fourth quarter, as we continued to ramp 100G capacity
  • 100G generally has better margins than 40G
  • Expect to see strong growth from 2 out of the 3 large data center customers that we have and resumption of growth from our largest customer
  • Need to be ready for the demand for Q1 and Q2 next year
  • Long term gross margin is 41% to 45%
  • Going to be selling everything we can produce in this quarter
  • $85 million in capital costs targeted for this year, with $26 million in chain so far this year
  • Build up some buffer inventory for what we believe will be a strong fourth quarter