What Analysts Like In Applied Optoelectronics' Q2

Applied Optoelectronics Inc AAOI reported Tuesday with second-quarter results that included a notable beat on the earnings line from the data center business. Here's what two Street analysts are saying after the print.

The Analysts

Cowen's Paul Silverstein maintained an Outperform rating on Applied Optoelectronics with a price target lifted from $42 to $53.

D.A. Davidson's Mark Kelleher maintained a Buy rating on Applied Optoelectronics' stock with a price target lifted from $50 to $54.

Cowen: Compelling Risk-Reward Profile

Applied Optoelectronics is now trading at a much better risk-reward profile exiting Q2, Silverstein said in a research report. (See the analyst's track record here.) 

The company reported a "significant" earnings beat mostly driven by revenue upside from the data center transceiver business, the analyst said. The outlook looks much better due to new 100G data center wins, most notably from a significant Chinese data center operator, he said. 

Applied Optoelectronics expects to see its 100G business double in volume growth in the back half of 2018 versus the first half of the year, with additional 100-percent growth projected in 2019, Silverstein said. Despite an encouraging outlook, management's third quarter guidance was in-line with the Street's expectations — although the company said it's taking a prudent approach, the analyst said. 

The China business now appears to be a "nominal to modest risk," as Applied Optoelectronics can shift manufacturing away from its China facility to two others that are outside of China, Silverstein said. This would give the company a significant cost advantage compared to peers, some of which only have manufacturing facilities in China.

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DA Davidson: Positioned For Demand Growth

Applied Optoelectronics remains well positioned to take advantage of the growth of hyperscale data centers, which require the small form-factor transceivers the company supplies, Kelleher said in a research report. (See the analyst's track record here.) 

D.A. Davidson's revised $54 price target is based on expectations for an EPS of $2.92 in 2019, which can sustainably grow at 15 percent; a P/E/G ratio of 1.2 times (up from 1.1 times); a P/E ratio of 16.5 times; and 91 cents per share in cash. The higher price target also factors increased visibility on end-user demand, along with encouraging pricing trends, the analyst said

Price Action

Applied Optoelectronics shares were trading up 11.15 percent at $41.38 at the time of publication Wednesday. 

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