Julie Lamb

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Hedge Fund Whiz David Shaw Drops the Ax on Applied Optoelectronics Inc (AAOI) and Micron Technology, Inc. (MU), Likes What He Sees in Alibaba Group Holding Ltd (BABA)

A close-up into this algorithmic expert billionaire's take on three tech players on Wall Street.

David Shaw once taught computer science, an expertise which led him to start nearly 30 years one of the foremost quant hedge fund firms: D. E. Shaw. With a background in computational finance and computational biochemistry, how did tech stocks like Applied Optoelectronics Inc (NASDAQ:AAOI), Micron Technology, Inc. (NASDAQ:MU), and Alibaba Group Holding Ltd (NYSE:BABA) fare under Shaw’s expert analytical opinion in the second quarter?


Having built a name on jet-set mathematics and razor-sharp algorithms, the man who collected a Ph.D. from Stanford University just eight years prior to starting his own hedge fund firm added around $400 million to his pocket just last year. It looks like Shaw’s computer and data-centric investment strategies lead to a nice small fortune, which is what places his quant firm among the leading hedge funds who showcase the best amounts of net returns. Algorithmic trades yield a great pay-off, which is how Shaw saw $25.3 billion in net gains in the hedge-fund verse. Additionally, the whiz’s opinion has been trusted by two different presidential administrations, from President Clinton in 199r to President Obama in 2009, serving on the President’s Council of Advisors on Science and Technology- all while nabbing the ACM Gordon Bell Prize twice. From arts and sciences to engineering, Shaw’s knowhow has been trusted nationally time and time again.

Let’s explore if Shaw’s mathematical mind saw positive results in bearish backward quarterly moves on Applied and Micron, but a bullish swing of the bat for Alibaba:

Applied Optoelectronics Gets a Hefty Chop in the Nick of Time

D. E. Shaw chose to shed 99% of its stake in the fiber-optic component maker to the tune of a 747,803-share withdrawal, leaving 6,062 shares left worth $375,000. How did Shaw’s roll of the bearish dice pay off for his second-quarter backtrack in Applied Optoelectronics?

Clearly the Stanford graduate’s slash in the tech player was a smart one considering Applied Optoelectronics’ team preannounced a third-quarter revenue underclass, much to investor’s dismay. Today, share have been sent clanging 22% to the floor in pre-market trading.

According to CEO Dr. Thompson Lin, the sharply off quarter performance was “negatively impacted by lower than expected sales to one of our large datacenter customers.” Could the data center customer that is the culprit for the firm’s inability to meet its quarterly revenue guide be its usually biggest fiber transceivers buyer: Amazon? Wall Street is abuzz with rumors today trying to take apart this bitter pill.

Though Lin acknowledges he is absolutely “disappointed,” he also believes, “Despite this shortfall, we maintained a strong gross margin profile in the quarter, and continued to experience solid demand with our other top datacenter customers,” adding that “we continue to feel good about our leadership position in advanced optics.”

There could be negative whispers in the fiber optics arena as a whole, warns Applied, whose team calls this gaffe a result of a “transition” that is “not unique to AOI,” bur rather, “it’s something that very likely will affect or has affected other companies as well.”

While CFO Steffan Murray had seen some writing on the wall before, explaining, “We indicated last quarter that we expected to see softer 40G demand,” the curveball was the “lower demand overall from one of our large customers.”

Providing some more context, Murray continues: “Revenue from this customer in the quarter was approximately 10% of total revenue compared with 47% last quarter. As a reminder, we have a vendor-owned inventory management model that we employ to this customer, which can impact our revenue visibility. As previously discussed, this VOI program allows the customer to pull inventory from a hub that AAOI manages and revenue is recorded at the time the inventory is pulled. We continue to have ongoing discussions with this customer, and based on our conversations, we believe that the disruption in order flow is related to the ongoing transition from 40G to 100G and not specific to AAOI. We also do not expect an inventory stocked in our VOI hub to be impaired because forecasts indicate that this inventory will be consumed over time.”

Positively, “other top data center customers” still indicate “good” demand for Applied’s fiber optics, says Murray, who points to “particular strength in our CWDM full MSA spec 100G transceivers.” Time will tell if Applied’s sell-off keeps dropping or not, but for now, Shaw is likely breathing a big sigh of relief.

The rest of Wall Street largely buys into what this tech player has to offer, as TipRanks analytics reveal AAOI as a Buy. Out of 9 analysts polled by TipRanks in the last 3 months, 7 are bullish on Applied Optoelectronics stock while 2 are bearish. With a return potential of 55%, the stock’s consensus target price stands at $91.38.

Micron Technology Stake Reduced Almost in Two

Micron Technology has not drawn Shaw’s confidence, as in the second quarter, the hedge fund whiz led his firm to dial down its position in the chip giant, shedding 488,771 shares down to 714,781 shares worth $21,343,00- a nearly half slice of the stake, gone. The stock saw a 2% dip yesterday, but one voice on Wall Street has actually become even more positive on this semiconductor player.

Barclays analyst Blayne Curtis likes escalating DRAM prices and calls for the first half of fiscal 2018 to be full of “insatiable demand for flash,” thanks to thirsty data center buyers. As such, Curtis projects “constrained” NAND supply, and says these price trends are “impossible to ignore.”

In reaction, the analyst cheers that “things still seem different this time,” maintaining an Overweight rating on MU stock while boosting the price target from $40 to $60, which implies a 48% increase from current levels. (To watch Curtis’ track record, click here)

Curtis writes, “DDR4 DRAM average spot pricing is tracking 18% Q/Q (our model was -2%) and we are adjusting our estimates to reflect this trend, while remaining conservative (now +2% for November). NAND spot pricing had trended down over the last 3 months but has reaccelerated as server and smartphone ramps take place in 2H (up 4% M/M). Further, MU NAND pricing has lagged spot for the past several quarters so we expect a catch-up this quarter especially if the positive trend continues.”

For the first fiscal quarter of 2018, the analyst has lifted his expectations for revenue from $6.33 billion up to $6.48 billion and for EPS from $2.16 to $2.26. Additionally, for calendar 2018, the analyst increases his expectations from $24.19 to $25.915 billion in revenue as well as from $6.92 up to $8.11 in EPS.

Wall Street sides with Curtis here over Shaw, considering TipRanks analytics indicate MU as a Strong Buy. Based on 23 analysts polled by TipRanks in the last 3 months, 21 rate a Buy on Micron stock while 2 maintain a Hold. The 12-month average price target stands at $50.09, marking a 23% upside from where the stock is currently trading.

Alibaba Stirs Shaw’s Excitement

Alibaba is a tech option not scaring Shaw off, but rather drawing him in further, with D. E. Shaw getting enthusiastic and bolstering its holding by a massive 300% to 288,431 additional shares. Now, Shaw has an investment of 475,300 shares worth $66,969,000, and the hedge fund trader is not the only one rooting for the e-commerce king of China’s success.

HSBC analyst Chi Tsang has recalibrated his valuation model that has him with stronger conviction at play, reiterating a Buy rating on BABA stock while bumping up the price target from $184 to $204, which represents a 13% increase from where the shares last closed. (To watch Tsang’s track record, click here)

Looking closely, Tsang’s bullish note shifts to a different valuation strategy that breaks down Chinese e-commerce king into various categories, valuing Alibaba on its core e-commerce platform, its cloud computing segment, digital media and entertainment, as well as the company’s vanguard endeavors and other divisions.

This kind of “additional granularity” in valuing Alibaba on a segmented basis leads to a “robust” financial evaluation, assigning a separate multiple to each new part of the divided model. When sizing up Alibaba’s core e-commerce platform, Tsang sees value circling 18 times the value of fiscal 2019 earnings before interest, taxes, depreciation, and amortization (EBITDA)- which is quite a difference from the other parts of Alibaba that have a value of 5 times its fiscal 2019 revenue.

Under this new valuation model, Tsang tags core e-commerce at $163 per share, cloud computing at $6 per share, digital media and entertainment at $8 per share, and the company’s innovation and other initiatives at $9 per share. This leads Tsang to project Alibaba to yield $10 per share in net cash for fiscal 2018.

The word of the Street is an overwhelmingly bullish one for this tech stock, as TipRanks analytics exhibit BABA as a Strong Buy. Out of 15 analysts polled by TipRanks in the last 3 months, all 15 are bullish on Alibaba stock. With a return potential of 8%, the stock’s consensus target price stands at $195.64.

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