Applied Optoelectronics Stock Falls on Q1 2024 Outlook: Buy the Dip (NASDAQ: AAOI ) | Private Equity Weekly

I introduced Applied Optoelectronics (NASDAQ: AAOI) on Seeking Alpha last December. The stock continued to rise, eventually hitting $25 per share around February 15th.The stock price moved up and down during this time, which allowed my short-term call option strategy to be implemented A huge success. During this period, I also increased my long-term position in stocks. I bought the stock around $18.

News about Applied Optoelectronics’ weak outlook for the first quarter of 2024 sent shares tumbling last week. The company expects revenue to decline and a net loss in the first quarter of 2024. Applied Optoelectronics reported strong fourth-quarter 2023 earnings, but fell short of expectations. The company expects better financial performance after the first quarter of 2024. The company’s shares fell sharply on Friday despite positive long-term forecasts. Prices fell more than 30%, falling below $12 per share, before recovering some of their losses in the after-hours market.

I believe prices will begin a new upward trend after investors fully digest the Q4 2023 results and Q1 2024 forecasts. I continue to give a buy rating and recommend investors to take heavy positions. I’m reloading my position. If the stock begins a new uptrend, it should recoup most of its 30% decline, delivering impressive gains. The options market for Applied Optoelectronics has not returned to normal yet, but once it does, short-term strategies will be viable again. Owning stocks right now is very risky, and this revaluation process is between the investor and the stock price.

Applied Optoelectronics manufactures and sells optical fiber networks product Used in telecommunications, cable television and data centers. The company’s products are in high demand for any company working with data information structures and data broadcasting. Artificial intelligence technology is further driving industry-wide demand for the company’s products.

Applied Optoelectronics’ fourth quarter 2023 results

The company reported financial results that showed improvement year-over-year and quarter-on-quarter, but were below company expectations. Applied Optoelectronics’ total revenue was US$60.5 million, an annual decrease of 1.94% and a quarterly decrease of 3.2%. The revenue decline was driven by lower demand for data center products. The company reported adjusted EBITDA of $4.8 million and net income of $1.6 million, or $0.04 per share. The most impressive metric is the company’s non-GAAP gross margin, which hit 36.4%, an all-time high for the company.

Data center product revenue was US$44.5 million, double the same period last year but down 9% from the previous quarter. The company said demand for its 100G and 400G products continues to increase year over year. Its cable TV business revenue was US$12.6 million, a year-on-year decrease of 67%, but a month-on-month growth of 22%.the company stated

As the industry shifts to the DOCSIS 4.0 system, sales of DOCSIS 3.1 products slow down, resulting in a decline in the CATV market. 74% of the company’s revenue comes from data center products; 21% from CATV products; 5% from FTTH, telecommunications and other products.

The company reported that the CATV business will remain weak until the MSO (Multiple System Operator) transition to next-generation technology, which will begin in mid-2024. The company has sent samples of its 1.8 Ghz amplifier products to both companies. Season 4 of MSO. The company expects to generate revenue from the new generation of products between April and June 2024. As MSO upgrades to DOCSIS 4.0 (Data Cable Services Interface Specification), the company will be ready to offer new system products.

Data center revenue accounts for the majority of the company’s overall revenue. 56% of the company’s data center revenue comes from 100G products, 36% from 200G and 400G products, and 4% from 40G optical module products. The increase in 200G and 400G products comes from the higher demand for AI computing in computer infrastructure. The company has sent 800G samples to other data centers and expects these products to begin shipping in the third quarter of 2024.

In 2023, the company signed two agreements with Microsoft to provide next-generation lasers for its data centers, including 400G and next-generation active optical cables. Revenue from the project will continue to be generated through the company’s 800G and higher products. The company expects to generate $300 million in revenue from data center expansion contracts in the coming quarters.

The company’s telecommunications division revenue was US$2.8 million, down 56% annually and down 8% quarterly. The company expects demand for 5G products in China to remain weak. The segment will remain weak due to weak demand.

Operating expenses were US$21.6 million, accounting for 35.7% of revenue. Operating expenses were flat compared with the same period last year. Operating expenses will increase slightly next quarter due to accelerated research and development related to 800G and 1.6 terabit data center product development.

Cash and short-term investments at the end of the fourth quarter of 2023 were $55.1 million. The company reported total debt (excluding convertible debt) of $38.7 million. As of the end of the fourth quarter of 2023, the company had inventory of $63.9 million. The company used $8.7 million in capital investments in the fourth quarter for production and research and development equipment.

Outlook for the first quarter of 2024

Applied Optoelectronics forecast a bleak outlook for the first quarter of 2024 but expects better results for the rest of the year as demand for next-generation technology changes. The company expects revenue in the first quarter of 2024 to be between $41 million and $46 million, which would be a quarterly decrease. The company expects profit margins to be between 21% and 23%, which is also down. Net loss should be between $10.9 million and $12.6 million, or between $0.28 and $0.33 per share.

In addition to the soft first quarter, Applied Optoelectronics also saw some synergies throughout the remainder of the year. The company reported new data center customers for its 400G and 800G products. Q2 2024 should reflect results from these new customers. The company will launch a 1.6 terabit product in 2025. The company expects artificial intelligence computing to keep demand for its products growing.

Historical performance and valuation

Click to enlarge

Financial data from Seeking Alpha, valuations from TIKR.com

On the positive side, Applied Optoelectronics has managed to grow its margins and gross profit over the past five quarters. The company’s net loss also declined, but there’s still more room for improvement. The company is growing cash on hand but doesn’t consistently report free cash flow.

If the company continues to improve margins and is able to reduce net losses in 2024, there will be significant improvement. In the best case scenario, there will be net income and positive cash flow. As the technology the company sells continues to evolve, supply and demand in the industry will ebb and flow. Applied Optoelectronics expects revenue and profits to increase through 2024 as demand for next-generation technologies increases. This trend requires less need for older generation technologies.

In terms of valuation, the company has been deemed overvalued and is currently undergoing a downgrade due to weak forecasts for the first quarter of 2024. Further investments in the stock will receive a high risk rating. The company remains undervalued based on its next 12-month enterprise value divided by revenue, and the stock has room to rise. The artificial intelligence aspect of this company’s future success may be considered here. Demand for its products will continue to remain high.

Stock price trend

Since I last covered Applied Optoelectronics, the company’s stock price has been trending upward. It lost support in mid-January and regained support in February. A zigzag movement in price action can be seen in this three-month price chart. The colored vertical line on the right represents after-hours price activity, when stock prices decline the most. The price could move back up to $16 or $17 per share to reflect its previous pre-earnings moves.

The share price downtrend shattered one-year compensation records. It is now up 365% over the past 12 months, compared to the 900%-1000% 12-month uptrend I observed in my last article. The company’s stock remains short squeezed, with 92% of shares outstanding. The stock still enjoys high institutional ownership of 68.88%, which may be the reason why the stock will regain a higher price channel.

There is a chance that the stock price remains low and remains in the lower price channel for some time.

Venture capital strategy

There is no risk in the company’s current business strategy and it will continue to achieve its short-term and long-term business goals. Applied Optoelectronics’ investment strategy is currently very risky as the company is considered overvalued and has been downgraded by investment firms.

In my last coverage of the company, I took a contrarian approach and will continue to do so. I recommend a long-term holding strategy until 2024, hoping for a return to the $18-20 per share price range. I recommend a short-term call option strategy. Once the stock price returns to its weekly uptrend and call volume returns to normal, I will recommend this strategy again. I now set my stop loss at $12.50 per share. The stock is likely to continue its downward trend without returning to its pre-profit glory. This week is expected to confirm a new trend or direction in price action.

in conclusion

In January and February, Applied Optoelectronics’ stock price continued to rise as predicted in my last report. Prices hit a high of $25 per share before the trend changed. In the past two months, the stock price has been rising and falling, and you can continue to play short-term call strategies. Shares fell more than 30% after the company issued bleak forecasts for the fourth quarter of 2023 and the first quarter of 2024. I continue to believe that the company’s stock price will return to a higher channel as investors fully digest its earnings report and outlook. The company’s products are in high demand, and trends in artificial intelligence computing will keep that demand high. The company is well positioned to meet the next generation technology needs of data centers and MSOs. I maintain my buy rating and recommend reloading on dips.