Applied Optoelectronics (AAOI) Jumps on Guidance

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Applied Optoelectronics (AAOI) preannounced second-quarter earnings that were far ahead of expectations Thursday.

The company said it anticipates revenue of $117.3 million, well above previous expectations of $106 million to 112 million. Gross margins have strengthened to 45%+ from the 41% to 42.5%, which is likely driven by high demand and the vertical integration setup of the company.

Earnings per share estimates soared. The company now expects to earn between $1.31 to $1.36 per share, up from $1.09 to $1.19 per share.

“Previously, we anticipated AAOI to earn between $4.50 to $5 per share in 2017,” said Tim Collins of Stirling Strategic Investor. “Now it’s much more likely earnings hit the high end of that range. We’d prefer to see one more quarter of results before adjusting our 6-to-12-month target for a stock price of $100.80 per share and 18-month target of $126. But our confidence in those projects has increased with AAOI’s new guidance.”

The stock started around $76, up about 4%. You can read Collins’ full analysis of the company at Stirling Strategic Investor.

Applied Optoelectronics produces fiberoptic networking products for internet data centers (IDC), cable television (CATV) and fiber-to-the-home (FTTH) networks.

It also offers optical modules, lasers, transmitters and transceivers and turn-key equipment, as well as headend, node and distribution equipment.

The company’s main market had been the cable television industry as a supplier of optical parts to gear makers like Aurora Networks, Cisco Systems (CSCO), Harmonic (HLIT) and Huawei (SHE). With competitors like Finisar (FNSR), Lumentu Holdings (LITE) and Acacia Communication (ACIA), AAOI has begun transitioning its focus on the faster growing IDC market.

Amazon is the company’s largest client, representing 55% to 60% of its revenue. But Facebook has increased itself to a near-20% customer in terms of revenue. Microsoft dipped below 10% due to an unrelated issue, but that should reverse and head higher as the year moves along. All told, these three companies accounted for 72% of AAOI’s revenue.

Once seen as a weakness, research firm Cowen now believes AAOI’s reliance on its cloud customers is a virtue. Demand from AAOI’s Cloud Titan customers has significantly improved the company’s operational outlook.

Currently, AAOI’s product breakdown is only 30% with 100G (gigabit) products, with 40G products making up the bulk of sales at 62%. This should shift over the next few years. In Q1, 100G revenue soared 76% to $23.9 million.


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