Applied Optoelectronics' 'Light' Q4, 'Soft' Guidance Keeps This Analyst On The Sidelines

Applied Optoelectronics Inc AAOI, a provider of fiber-optic networking products, reported fourth quarter results that came in mixed, but its first quarter revenue and sales guidance were both short of the Street's estimates. The stock fell more than 20 percent.

The Analyst

Loop Capital Markets' James Kisner maintains a Hold rating on Applied Optoelectronics' stock with an unchanged $35 price target.

The Thesis

Applied Optoelectronics' revenue and gross margin were "light" in the fourth quarter and attributed to the ongoing shift from 40G to 100G in its hyperscale customer base, Kisner said in a note. Recent checks that were highlighted in a January note found that the company is facing competition in the space which may be slowing down 100G revenue; this trend may explain why 100G revenue was 40 percent lower quarter-over-quarter.

The company's guidance  implies revenue will fall short of the Street's estimate by 20 percent and EPS by 55 percent, according to Kisner. The "soft" guidance was justified by management as one of its hyperscale customers is facing ongoing inventory headwinds and fewer production days in China due to the Lunar New Year.

Applied Optoelectronics' margins are "hanging in there" and management's 41 to 45 percent target gross margin range for the foreseeable future is encouraging, the analyst said.

The company could return to growth and benefit from the "robust" potential in the hyperscale market, however, it's "very difficult to have confidence" in estimates due to the volatile nature of the business.

Price Action

Shares of Applied Optoelectronics hit a new 52-week low of $26.35 Thursday morning, down more than 22 percent on the day.

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