Applied Optoelectronics Inc (AAOI) Stock Gets Whacked on Disappointing Earnings; B. Riley FBR Cuts Price Target

Has Wall Street gone a bit overboard punishing Applied Optoelectronics Inc (NASDAQ:AAOI)? The fiber-optic component maker’s shares continue to fall Thursday on the heels of mixed 4Q results and 1Q outlook that was significantly below consensus. As of this writing, Applied shares are down nearly 23% to $26.47.

Applied Optoelectronics CEO Dr. Thompson Lin commented, “We achieved revenue in the fourth quarter of $79.9 million, which was slightly below our expectations due to lower demand from our datacenter customers as they continue to evolve their network architectures. While our revenue came in slightly below expectations, I am pleased with our ability to continue to generate strong gross margin even in a price sensitive market […] Even though we see inventory headwinds with one of our customers and the typical seasonality in Q1 due to fewer production days in China because of the Lunar New Year, we continue to expect the second half of 2018 to be stronger than the first half. We believe we have a strong leadership position in advanced optics, and this belief is bolstered by a large purchase commitment that we disclosed earlier today.”

B. Riley FBR analyst Dave Kang noted, “One major surprise in 4Q was that 40G increased Q/Q while 100G declined Q/Q, signaling that the 40G headwind will be bigger than expected going forward. Meanwhile, the company expects R&D to remain elevated in 2018, as it is investing in 200G and 400G. AAOI’s capex was $67M in 2017 and is expected to increase to $109M in 2018. As a result of higher capex in 2018, we believe the net cash position could decline from $34.4M in 4Q17 to ($11.0M) by 4Q18 implying means that the company may need to raise capital. Despite the company’s supply agreement with Facebook (FB), we lower our 2018 EPS estimate from $3.08 to $1.87.”

Kang reiterates a Neutral rating on AAOI shares, while lowering his price target from $32.00 to $30.50, which implies a potential upside of 16% from current levels. (To watch Kang’s track record, click here)

Overall, Wall Street seems to be divided on the stock as 3 recommend buying shares of Applied Optoelectronics, 3 advice holding, and 1 remains bearish. The average 12-month price target between these 22 analysts is $42.25, marking a 60% potential upside from current levels.