Demand Shift Causes AAOI to Fall 30%: Buy Opportunity?

04/21/2016 9:48 am EST


Michael Berger

President & Founder,

After an unexpected shift in demand constrained production, Applied Optoelectronics pre-announced earnings that missed expectations and the shares have fallen 30% since then says Michael Berger, Associate Editor of, who highlights the reason why he sees value at current levels.

Applied Optoelectronics, Inc. (AAOI) has declined approximately 30% in value after the company pre-announced first quarter earnings that were well below Wall Street expectations.

After the market closed on Monday, AAOI guided for $50-$50.5 million in revenue and a loss of $0.04 to $0.06 in earnings per share. This announcement came after the company previously guided for $53 million in revenue and $0.21 - $0.28 in earnings per share.

Unexpected Demand Shift

Management attributed the lower earnings to higher than expected cost of goods sold and R&D expenses. The higher expenses were a result of production issues similar to what the company faced during the fourth quarter of 2015.

Last quarter, an unexpected shift in demand for one of the longer-reach 40G transceivers constrained production and forced the company to return to an older, higher-cost design.

First Quarter Miss Impacts Investor Sentiment

Many investors and analysts expected these issues to be resolved by the first quarter and the miss has renewed concerns around management credibility.

The preliminary release did not contain any comments beyond the first quarter. We expect to see R&D expenses trend back to historic levels as execution improves. We also expect the gross margin improvement story to continue, but from a lower starting point.

An Emerging Industry

The market for 100G inside the data center is just emerging and it shows great promise. We believe web scale operators have great demand and AAOI has competitive advantages through its vertical integration and capacity investments.

AAOI offers good exposure to favorable trends in data center spending especially with the emergence of a 100G transceiver cycle. The emergence of this product has created an opportunity for AAOI to diversify its customer base.

Attractive Valuation Following Sell-Off

Although we continue to remain positive around fundamental demand for 100G deployments, the pre-announcement introduced new distractions regarding execution. If the company can improve on execution, we think AAOI could report better than expected earnings in the following quarters.

AAOI traded at a new 52-week low yesterday and the shares are currently trading in oversold territory. We remain favorable on the company’s long-term outlook and would be buyers of AAOI on further weakness.

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