Long-term investors may want to buy the dip in AAOI stock

Applied Optoelectronics Inc. NASDAQ: AAOI is a leader in fiber optic network products. The company designs and manufactures advanced fiber optic products, components and modules used in broadband cable networks, telecommunications, fiber optic deployments and data centers. High-speed optical transceivers are needed in data centers to transmit oceans of data needed to run artificial intelligence (AI) and high-performance computing (HPC) platforms. Applied is a benefactor of secular tailwinds in the data center market.

Increasing secular tailwinds

Data centers are experiencing a surge in growth due to secular tailwinds, including the growth of artificial intelligence platforms, digital transformation, the Internet of Things (IoT), and cloud computing. Applied shares have risen more than 365% in the past twelve months since his deal Microsoft Co. NASDAQ: MSFT provide optical equipment to upgrade their data centers. The deal was expected to generate hundreds of millions in revenue. However, Applied shares plunged more than 30% in its fourth-quarter 2023 earnings report, where it significantly lowered its first-quarter 2023 guidance estimates.

Beat modest earnings

The IT and technology company surprised analysts and investors with its downward guidance estimates. Its fourth-quarter 2023 earnings report beat EPS estimates by 4 cents, coming in 4 cents shy of consensus analysts’ estimates for a break-even quarter. Revenue fell 3.2% year-over-year to $60.5 million, below consensus estimates of $65.19 million. Gross margin improvements allowed the company to generate a small non-GAAP net profit for the quarter, for the first time in several years. Although fourth-quarter revenues fell short of expectations, gross margins outperformed projections, generating non-GAAP EPS at the high end of the guidance range.

Guide to the big stinker

The big shock came from lowered Q1 2024 forecasts for EPS losses of between 33 cents and 22 cents versus analysts’ estimates for a loss of 1 cent. Revenue was revised down to between $41 million and $46 million from consensus estimates of $66.18 million.

The Lunar New Year is to blame

Applied CFO Stefan Murray pointed out that most of the guidance cut for the first quarter of 2024 is centered around the Chinese Lunar New Year and some price reductions. Lunar New Year is a 15-day holiday that begins on February 10, 2024. He commented: “A lot of these products are made in our factory in China, so the mix of these products has shifted a little unexpectedly towards us towards the end of last year, which resulted in us essentially having to make new products that we hadn’t necessarily planned ahead of time and that’s why Lunar New Year caught us a little unprepared this year.” The company expects substantial improvement in the second quarter of 2024.

CEO Insights

Applied Optoelectronics founder and CEO Dr. Thompson Lin commented on how they started to see weakness in demand towards the end of the fourth quarter of 2023. The company still posted non-GAAP gross margins of 36.4%, which is It was the highest quarterly gross margin recorded in the last five years. This was driven by an improvement in the product mix and the contribution of non-recurring engineering projects. Total revenue for its data center products more than doubled year over year to $44.5 million, but fell 9% sequentially.

Sales of its 400G products increased 8-fold over the same period. However, total revenue for the CATV segment fell 67% year over year to $12.6 million. The company is seeing success for its 400G and 800G products from several new data center customers. Dr. Lin commented during the Q&A session of the conference call: “We said we have delivered 800G samples to three new large-scale data centers in the United States, and we believe that volume will start to increase, I would say, by the end Q2 or early Q3. Same thing, I think we believe Q2 up to 400G can be very strong.”

Microsoft’s revenues are not guaranteed

Applied CFO Stefan Murray commented on how they have signed two agreements with Microsoft to develop next-generation lasers for its data centers, for 400G and beyond and next-generation active optical cable (AOC). While not guaranteed, the contracts “suggest that revenue from these products could exceed $300 million over the course of several years of these developments.”

Analyst Dpropriograde

B.Riley Securities analyst Dennis Kang downgraded the shares to Neutral from Buy, lowering his price target to $16 from $22. He noted in particular that Microsoft’s ramp delay is slower than expected and that the escalation of its AOC 400G procurement terms is concerning. He noted, “A company the size of MSFT would have to consume millions and millions of AOCs and other optical modules, especially since MSFT was an early adopter of AI. At this point, there seem to be more questions than answers regarding to MSFT products”. relationship with AAOI.”

Applied Optoelectronics analyst ratings and price targets I’m on MarketBeat. Applied Optoelectronics competitors and competitor titles can be found at MarketBeat Stock Screener.

Daily mug template

The daily candlestick chart on AAOI shows a breakdown of the cup pattern. The cup lip line formed at $23.95 on December 15, 2023. AAOI proceeded to sell to lows of $14.80 on January 29, 2024. AAOI formed a rounded bottom to steadily climb back up to the cup lip line cup lip, topping it at $24.75. February 16, 2024. It looked like a pullback handle was forming at $18.48 until the Q4 2023 earnings report caused a 30% gap to forward guidance. AAOL narrowed the gap to $14.68. The daily relative strength index (RSI) has fallen above the 40 band. The daily 200-period moving average (MA) support lies at $11.43. The pullback support levels are at $12.66, $11.31, $9.51, and $8.36.

Before considering applied optoelectronics, you’ll want to hear this.

MarketBeat tracks daily Wall Street’s highest-rated and best-performing research analysts and the stocks they recommend to their clients. MarketBeat identified the five stocks that top analysts are quietly whispering to their clients to buy now before the broader market takes hold… and Applied Optoelectronics wasn’t on the list.

While Applied Optoelectronics currently has a “Moderate Buy” rating among analysts, top-rated analysts believe these five stocks are better buys.

View the five stocks here