Applied Optoelectronics (AAOI) Rallies as Jun Zhang Puts Encouraging “Driving Opportunities” in the Limelight

Rosenblatt's Jun Zhang shares positive insights on AAOI, and Wall Street celebrates good potential news for the challenged fiber-optic component maker.

Applied Optoelectronics (NASDAQ:AAOI) investors are going wild tearing up the Street today after a bull’s key vote of confidence spotlights a market share comeback. In reaction, shares have been popping almost 13% today, as the Street celebrate the first slice of good news that has certainly been a long time coming.

For context, this fiber-optic component maker has been confronting cutthroat rivalry that led to a dismal fourth quarter print- with walloped shares and dashed investor assurance in its wake. The fourth quarter earnings disaster had followed a sharp underperformance in the third quarter, with rumors of substantial lost revenue from Amazon as the iceberg that sunk AAOI’s momentum.

Flash forward to today’s bullish research note from Rosenblatt analyst Jun Zhang who believes the company is “taking back share with hyperscale providers,” based on research into CWDM4 demand from these providers. Zhang highlights, “a combination of pricing and quality issues are driving opportunities” for the tech player to regain share.

In a nutshell, “Over the past month we have observed many interesting changes in the optical market. Our research suggests that Applied Optoelectronics […] has gained share at Facebook […] versus Innolight […] We believe that AAOI could grow its share around CWDM4 from what we estimate is currently around 10% to 30-35%, in line with Intel. We believe that AAOI is seeing improved traction due to its aggressive pricing and ongoing quality issues at Innolight. Given these factors, we believe AAOI could take share at Amazon […] as well as H3C in Q2. As AAOI’s confidence grows, we would look for the company to grow its manufacturing capacity in order to fulfill rush orders. Based on this research, we believe AAOI could see a strong sequential rebound in Q2, coming off what we believe will be a weak Q1,” Zhang contends, painting a scenario that “should be positive for shares.”

Caution predominantly weighs over the fiber-optic component maker’s shares, as TipRanks shows a largely split Wall Street between the bulls, the bears, and the sidelined. Out of 8 analysts polled in the last 3 months, 3 rate a Buy on AAOI stock, 3 maintain a Hold, while 2 issue a Sell on the stock. However, is some healthy optimism baked into these play-it-safe expectations? Consider that the 12-month average price target stands at $35.56, marking an encouraging 25% in return potential from where the stock is currently trading.

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