The wave of generative AI adoption forces data centers to deploy more complex infrastructure, including sophisticated optical interconnects. With a unique manufacturing capability, Applied Optoelectronics (AAOI) is solidifying its position in the realm of fiber-optic networking. The company’s aggressive focus on data center growth has already seen its revenue rise significantly, and that trajectory is expected to continue.
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With revenue opportunities from its 400G and 800G products and a commitment to improving gross margins, AAOI is a compelling candidate for investors interested in exposure to this unique aspect of the AI growth story.
Applied Optoelectronics’ Ramping Up Earnings
Applied Optoelectronics develops fiber-optic networking products and operates in the U.S., Taiwan, and China. The company has built a robust clientele that includes internet data center operators, cable television, telecom equipment manufacturers, and internet service providers. The company’s distribution network comprises both direct and indirect sales channels.
Applied Optoelectronics had previously announced two significant agreements with Microsoft (MSFT) aimed at the development of 400G products and beyond, including an innovative program to create advanced lasers for Microsoft’s data centers and the development of 400G and next-generation active optical cables. The company is ramping up delivery in Q3 and Q4, and while the future revenues aren’t assured, the company has expressed confidence that its 400G and 800G products could generate more prolonged revenues surpassing the past earnings from the 40G product cycle, potentially exceeding $300 million over several years.
Applied Optoelectronics’ Financial Results & Outlook
The company recently released its Q2 2024 financial results. Revenue of $43.3 million marked year-over-year growth of 4.1%, though it was a slight miss to analysts’ expectations. Gross margins showed improvement, with GAAP gross margin at 22.1% and non-GAAP gross margin at 22.5%, both higher than Q1 values. However, the company reported a non-GAAP net loss of $10.9 million, translating to earnings per share (EPS) of -$0.28, outperforming consensus projections by $0.01.
Following second-quarter results, AAOI’s management has offered guidance, projecting revenue from $60 million to $66 million for Q3 2024. The company also expects a non-GAAP gross margin between 24% to 26%. Furthermore, non-GAAP net loss is projected to be between $5.9 million and $8.6 million, translating to a non-GAAP loss per share range of $0.14 to $0.20.
What is the Price Target for AAOI Stock?
The stock has been a bit volatile, with a beta of 1.74, as it has climbed 66% over the past three years. It trades near the middle of its 52-week price range of $6.66 – $24.75 and demonstrates positive price momentum by trading above the 20-day (9.80) and 50-day (9.51) moving averages. With a P/B ratio of 2.85x, it appears to be priced in line with the Communication Equipment industry, where the average P/B ratio is 2.9x.
Analysts following the company have been cautiously optimistic about the stock. For example, Raymond James analyst Simon Leopold, a five-star analyst according to Tipranks’ ratings, recently upgraded the shares to Outperform from Market Perform with a $17 price target. He expects ongoing share volatility, though he believes the company will likely experience upward estimate revisions.
Applied Optoelectronics is rated a Moderate Buy based on the recommendations and price targets assigned by three analysts. The average price target for AAOI stock is $14.00, representing a potential 18.54% upside from current levels.
Final Analysis on AAOI
Applied Optoelectronics is well-positioned to grow market share in the fast-growing field of fiber-optic networking. Despite a modest revenue miss in Q2, the company demonstrated improved gross margins and an EPS that outperformed consensus forecasts, and management has offered encouraging Q3 projections. The stock has shown positive price momentum despite notable volatility and trades at a reasonable price. AAOI presents investors with a unique opportunity to participate in the future of AI infrastructure, making it a compelling option for addition to portfolios.
