Applied Optoelectronics Inc AAOI has two problems that warrant a bearish stance on the stock, according to Loop Capital Markets' firsthand checks within the optoelectronics sector.
Applied Optoelectronics is experiencing product quality issues with its100G CWDM4 transceivers in which its lasers fail after thousands of hours of operation, and the quality concerns could result in market share loss, Kisner said in the Thursday downgrade note. (See his track record here.)
While the company could solve the problem by procuring lasers from suppliers, that move would negatively impact gross margins, the analyst said.
Industry contacts also told Loop Capital the pricing environment for 100G CWDM4 data center optics is "very tough," Kisner said. Further checks suggests CWDM4 average selling prices are around $250, but could dip to $200 by September of next year versus Loop's expectations for $300 in the the third quarter of 2018 and $250 by the third quarter of 2019.
While one anecdote suggested a price as low as $175, that price is likely an outlier, the analyst said.
The concerning findings suggest Applied Optoelectronics is likely to start procuring 25G lasers externally through 2019, Kisner said. This warrants a decrease in 2019 gross margin expectations from 40.5 percent to 34.4 percent, along with expectations for lower revenue stemming from lower selling prices.
Applied Optoelectronics shares were down 12.7 percent at $27.36 at the time of publication Thursday.
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