The Bull And Bear Scenarios Playing Out In Applied Optoelectronics

Fiber-optic networking company Applied Optoelectronics Inc AAOI has been on a rollercoaster ride in recent months. As of late July, the stock was up nearly 500 percent year-to-date before shaving off more than a third of its market cap in the past month.

Traders and Wall Street analysts are polarized on the stock. Applied Optoelectronics is one of the most heavily-shorted stocks in the market, yet bulls see value in the name. Traders see an extremely volatile stock that has the potential for huge moves in either direction. So which direction is Applied Optoelectronics headed next?

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The Bull Case

This week, Raymond James analyst Simon Leopold said the stock is headed higher. The company’s facilities in South Texas weren't impacted by Hurricane Harvey, and Leopold sees opportunity in the company’s recently-announced EML laser.

James says the new EML laser could be the key to reaching 400G speeds within datacenters with four-lane pulse amplitude modulation.

“We believe that potential end designs could include 400G CFP8 for +10 kms, 100G, and 200G form factors for extended reaches (up to 40 kms) as well as the lucrative QSFP28 LR4 applications for 10 kms, which we believe continues to facilitate the transition from the bulkier CFPx family into denser form factors,” James wrote.

In addition to the fundamental bull case, Benzinga Pro has reported multiple buyout rumors circulating about Applied Optoelectronics this month. One rumor said Cisco Systems, Inc. CSCO is interested in a buyout. The other rumor claimed Huawei Technologies is interested in a takeover, leaving the door open for a major takeover at some point.

The Bear Case

But while Raymond James has a Strong Buy rating on the stock, BWS Financial analyst Hamed Khorsand sees things a little bit differently. According to Khorsand, Applied Optoelectronics’ disappointing guidance, which sent the stock tumbling 25 percent in early August, should be a troubling sign for bulls.

“AAOI is facing price erosion at an accelerated rate that could cause quarterly numbers to continue trending down,” Khorsand wrote on August 16.

He sees management’s unwillingness to comment on its top three data center clients in the company’s recent earnings call as a potential red flag, especially since the company provided details on those clients just a quarter ago.

When Benzinga asked Khorsand about the recent buyout rumors, he said it feels as if Applied Optoelectronics bulls are trying to do everything they can to keep the stock above the $60 level.

"The rumors seem plain out absurd," Khorsand told Benzinga in a Wednesday email. "Many players in China Hauwei could buy and have easier time getting approval for. Same for the CSCO rumor today. AAOI does not fit the kind of investments CSCO has usually made."

BWS maintains a Sell rating and $25 price target for the stock.