Meet Applied Optoelectronics Inc’s New Skeptic

Do Applied Optoelectronics investors have a reason to be concerned? Dave Kang sure does think so.

The market has divided itself into two camps. The bulls argue that the worst is behind Applied Optoelectronics Inc (NASDAQ:AAOI), while the bears argue that the market is too optimistic about AAOI’s recovery, which could take a long, long time. B.Riley FBR analyst Dave Kang has found himself in the middle.

Kang initiates coverage on shares of Applied Optoelectronics with a Neutral rating and price target of $38, which represents a potential upside of 7% from where the stock is currently trading. (To watch Kang’s track record, click here)

Kang wrote, “While 100G QSFP28 enjoyed strong demand for most of 2017, we believe supply may have caught up and perhaps slightly surpassed demand in recent months, mainly due to increased competition. As a result, our checks indicate pricing, especially on 100G QSFP28 CWDM4, has deteriorated significantly in recent months. This could be problematic for AAOI since 100G QSFP28 was expected to be the main growth driver, as 40G is already in decline. In a sense, even though AAOI’s direct Chinese exposure is negligible, the company could be an indirect victim of the recent China slowdown. While most of AAOI’s competitors were tapped out in capacity as a result of unusually strong demand from China in 2016, the recent slowdown in China has forced competitors to look elsewhere to keep their facilities operating at higher utilizations. As a result, the datacenter market, which at one point was thought to be a safe haven, has become too crowded in recent months.”

“In addition, Our near-term concern is that Microsoft, which is one of AAOI’s top three customers, could delay datacenter plans by a quarter or two in 1H18 due to chip-related issues. Lastly, we are concerned about significant customer concentration,” the analyst added.

Where does the rest of the Street side on this optical-components maker? It appears mostly bullish, as TipRanks analytics demonstrate AAOI as a Buy. Out of nine analysts polled in the last three months, six are bullish on Applied Optoelectronics stock, one is sidelined, and 2 are bearish. With a return potential of nearly 70%, the stock’s consensus target price stands at $60.06.

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