The pain continues for fiber-optic component maker Applied Optoelectronics (NASDAQ:AAOI), which has struggled over the past year with slowing orders for its parts from cloud companies such as Amazon.
In a research note released today, B.Riley FBR analyst Dave Kang noted that the Trump administration’s $200B Chinese tariff proposal presents a significant risk to AAOI as optical transceivers that are manufactured in China and imported to the US will be subject to a tariff rate of 10%. The irony: Instead of benefiting US optical companies at the expense of their Chinese-based counterparts, Kang believes it will have a negative impact.
Kang wrote, “The tariff-related uncertainty could impede the anticipated optical recovery in 2H18. Our latest checks indicate that demand has not been affected by the trade-war headlines thus far, but this is perhaps because the tariffs have yet to go into effect”
“We are uncertain as to whether AAOI’s Taiwan and China have comparable capabilities and note that it could take some time for Taiwan to get up to speed on Chinese products should AAOI decide to transition Chinese production to Taiwan. Even if the two locations have comparable capabilities, we believe manufacturing costs will be higher in Taiwan, which is a major issue since the datacom industry is already faced with severe pricing pressure leaving little room for cost inflation. Compounding the situation is that most of AAOI’s products are sold to US data center customers such as Facebook and Amazon. Therefore, we believe AAOI will be most vulnerable to the tariffs if it goes into effect in September,” the analyst continued.
Net net, Kang rates Applied Optoelectronics a Neutral with a price target of $30.50, which represents a potential downside of 30% from where the stock is currently trading. (To watch Kang’s track record, click here)
Out of the 12 analysts polled by TipRanks in the past 12 months, 6 rate Applied Optoelectronics stock a Buy, 3 rate the stock a Hold and 3 recommend a Sell. With a downside potential of nearly 11%, the stock’s consensus target price stands at $38.83.