Fiber-optic networking company Applied Optoelectronics (AAOI) has grabbed investors’ attention as its share price has rocketed up over 270% in the past three months. The company recently reported financials for the third quarter of 2024, beating revenue expectations thanks to double-digit growth in its data center business driven by customer interest in its 400G products. The company is confident in the future growth of its data center and CATV businesses, expecting a significant jump in revenue for the last quarter of 2024.
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While the company presents an intriguing prospect for long-term growth, the recent jump in price has pushed the stock’s valuation into rich territory, so investors may want to hold off and look for a more opportunistic entry point.
Applied Optoelectronics Forging Key Partnerships
Applied Optoelectronics is a developer of fiber-optic networking products, with operations spanning across the U.S., Taiwan, and China. Its robust client portfolio includes major industry players such as internet data center operators, cable television, telecom equipment manufacturers, and internet service providers.
The company has partnered with Microsoft (MSFT) to engineer advanced lasers for Microsoft’s data centers and the development of 400G and next-generation active optical cables. Shipments for these products are set to increase in the fourth quarter. Even though future revenues are not guaranteed, there is a strong belief that its 400G and 800G products may generate sustainable revenues that eclipse past earnings from the 40G product cycle, potentially exceeding $300 million over multiple years.
Applied Optoelectronics’ Recent Financial Results
The company recently announced its financial results for Q3 2024. Revenue of $65.15 million exceeded analysts’ projections by $2.38 million. The company attributed the strong revenue to a surge in demand for its 400G products and greater interest in its 1.6 Terabit transceivers, which fueled growth in its data center and CATV businesses.
However, the company experienced increased research and development expenses due to a surge in customer demand, particularly within the data center department. This contributed to a net loss of $17.8 million, higher than the $9 million loss posted in Q3 2023. Non-GAAP earnings per share (EPS) of—$0.21 fell short of expectations by $0.04.
Management has issued guidance for the fourth quarter of 2024, projecting revenue between $94 million and $104 million. The non-GAAP gross margin is anticipated to be 27.5% to 29.5%. The company’s non-GAAP net income is expected to be between a loss of $1.9 million and an income of $1.7 million. Additionally, the non-GAAP income per share prediction fluctuates between a loss of $0.04 and earnings of $0.04.
Is AAOI a Buy?
The stock has been highly volatile, sporting a beta of 3.06, as it has experienced over 675% appreciation in the past three years. It trades at the high end of its 52-week price range of $6.70 – $44.32 and demonstrates ongoing positive price momentum as it trades above all major moving averages. Its P/S ratio of 8.98x is close to three times that of the average for the Information Technology sector at 3.26x, marking it as relatively richly valued.
Analysts following the company have taken a cautiously optimistic view of AAOI stock. For instance, Rosenblatt analyst Mike Genovese recently raised the share price target to $27.50 (from $20) while maintaining a Buy rating, noting the Q3 beat and its Q4 revenue estimates. He further commented that Rosenblatt is increasing its 2025 and 2026 revenue and EPS estimates.
Based on the three analysts’ recent recommendations, Applied Optoelectronics is rated a moderate buy. Their average price target for AAOI stock is $22.17, representing a potential -49.65% downside from current levels.
Final Analysis on AAOI
Applied Optoelectronics has demonstrated significant growth with a surging share price and revenue exceeding expectations. This growth is primarily driven by the data center business and interest in its 400G products. The company’s collaborations, like the one with Microsoft, indicate promising further upside potential. Though AAOI shows robust long-term growth potential, analysts’ price targets suggest a pullback from current levels, meaning investors might want to wait for a more suitable entry point.
