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Applied Optoelectronics: 2024 Should Be Strong But Downgrading On Valuation

2023-11-28 06:13:41 ET

Summary

• After briefly dipping below $7 in late October, shares of Applied Optoelectronics Inc. have rallied by approximately 100% this month so far.
• With leading AI player and key customer Microsoft Corporation trading at new all-time highs, shares of Applied Optoelectronics are back in the spotlight again.
• Earlier this month, AOI reported third quarter results and provided fourth quarter guidance largely in line with consensus expectations. However, this was below my projections for a beat-and-raise quarter.
• In combination with some anticipated headwinds from decreasing 100G product revenue going forward and assumptions for the company repaying the March convertible note maturity with cash raised from ongoing open market sales, I have decided to revise my aggressive assumptions for next year.
• Consequently, I am downgrading the company's shares from "Strong Buy" to "Hold" while decreasing my price target from $22.50 to $15.00.

Note:

I have covered Applied Optoelectronics, Inc. (AAOI) previously, so investors should view this as an update to my earlier articles on the company.

A little over two months ago, I urged investors to buy shares of fiber-optic networking products provider Applied Optoelectronics, Inc. or "AOI" following a 40% retreat from its 52-week-high of $16.26 marked on August 24.

While shares are up by close to 50% since that time, trading in the stock has been highly volatile. What at first appeared to be a well-timed call started to turn into a major nightmare over the month of October and I ultimately ended up being stopped out of a sizeable position at a major loss.

However, after briefly dipping below $7 in late October, shares have regained their footing and rallied by approximately 100% this month so far, likely as a result of renewed strength in leading AI player and key customer Microsoft Corporation (MSFT)

Company Press Releases

In Q3, Datacenter revenues contributed almost 80% of total sales. Within the Datacenter segment, both the company's 100G and 400G products experienced strong growth with the older 100G technology surprisingly still contributing the lion's share, as outlined by management on the conference call :

In the third quarter, 74% of our data center revenue was from our 100G products, 13% was from our 200G and 400G transceiver products, and 7% was from our 40G transceiver products. Notably, revenue for our 100G products increased 75% sequentially, while revenue for our 400G products increased 74% sequentially and accounted for just under 11% of our total data center revenue in Q3.

To compensate for the material cash outflows, AOI continued to sell shares into the open market under its recently expanded Equity Distribution Agreement with Raymond James (RJF):