Vertically integrated fiber-optic networking provider Applied Optoelectronics Inc= AAOI saw its stock peak north of $100 per share in 2017, but it has since fallen to the $30 level. Investors hoping for a complete rebound in the stock may want to reconsider their thesis, according to Loop Capital Markets.
The Analyst
Loop Capital Markets' James Kisner initiated coverage of Applied Optoelectronics with a Hold and $35 price target.
The Thesis
Applied Optoelectronics has proven to investors it can compete "very effectively" in data center optics, as roughly 80 percent of its revenue is generated from sales of transceivers, Kisner said in the initiation note. The company's revenue in the segment rose from just $5.3 million in 2012 to over $300 million for a four-quarter period ending in September 2017.
Applied Optoelectronics also saw a significant slowdown in sales during the September quarter, mostly due to a slowdown in orders from its historically largest customer, Amazon.com, Inc. AMZN, the analyst said. The company cited a quicker-than-expected transition from 40G to 100G, but the analyst's checks also found that competition is ramping in the 100G CWDM4 space — so Applied Optoelectronics may have "some trouble" maintaining the 40 percent-plus gross margin rate it demonstrated in 2017, Kisner said.
Applied Optoelectronics' stock is trading at 10.6x the analyst's 2018 and 2019 EPS estimates or at a 9.5x multiple when excluding the $3.53 per share in net cash. These multiples are "significantly below" the communication equipment group's average of 14x 2019 EPS. The analyst's $35 price target is based on a 9x 2019 EPS multiple —excluding cash —which is "appropriate," as it balances the company's growth prospects with competitive and margin risks, Kisner said.
Price Action
Shares of Applied Optoelectronics were up slightly at $33.34 in Tuesday morning trading.
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