-Balance sheet: Cash $75M, Debt $27.4M
-18.4 million shares in the float, 8.7 million shares or 48% of float short. This high a % sold short leads to serious volatility. Lets look at the short case.
Bear/FUD arguments,
-shift away from 40G is happening more quickly than the shift towards 100G, or at least at one of AOI’s main customers.
100G capacity in the datacenter is still far from being filled as new datacenters continue to pop up and existing ones overhaul their infrastructure. These ongoing developments are the growth drivers for AOI’s revenue and margins, not 40G:
The shift is going on throughout the optical communications industry but perhaps most notably in the datacenter, which is AOI’s primary market. Revenues from datacenter applications in Q2 for AOI grew 140% YoY to nearly $100 million or 85% of overall sales, with a 62% YoY increase in 100G revenue driving the growth.
-the company’s revenues are highly concentrated in two large customers, Amazon (AMZN) and Microsoft (MSFT), which accounted for 47% and 27% of sales respectively.
This is a highly concentrated customer base that might not be a risk right now, but could become one should AOI be unable to diversify. Fortunately, AOI is adding customers and diversifying away from such a concentrated source of revenue,
Here is a quote from an author of a second article that I link to below contending the above bear arguments weakness.
As I indicated in my last note on Applied Opto on August 4th, the company is currently qualifying over a dozen potential new data center related customers. I now believe this is the most it has cultivated at the same time since the company entered the data center optical transceiver market and portends well for 2018 revenue growth and customer de-concentration.
-Another possible headwind could be oversupply in the 100G market, which would devastate AOI as well as the rest of the industry should it occur. Commodity business?
this seems unlikely at this time due to the sheer number of applications and industries that are demanding these connections. Further, AOI’s vertically-integrated operations make it a cost leader and therefore a company with a high probability of surviving such a downturn should one come to pass.
Second linked author here again,
I went back and studied historical capex trends, and it is now apparent to me that Applied Opto will spend a record amount of money on capital expenditures in 3Q/4Q 2017. Clearly, the company sees solid growth in 2018 based on forecasts from existing and new customers. Much of this capex is destined for pure capacity expansion.
https://seekingalpha.com/article/4098964-applied-optoelectro…
A lot of comments on this article. Among the last third or so of commenters some posted notes from the presentation AAOI made on August 15th. There is only a slide deck available for the presentation.http://files.shareholder.com/downloads/AMDA-1TEN4W/503279778… There are upcoming events over the next two months in China, Sweden and Colorado.
Another part of the bear case is the controversy following the August 15 presentation,
-BWS Financial published a bearish report where the analyst claimed Applied Opto stated in its field trip presentation on August 15, 2017, that accelerating price erosion had materialized that could drive down quarterly results and harm margins.
Authors response, To be gracious, I think the BWS analyst took the company’s comments on aggressive and continuing cost reductions, which were stated to defend the potential to maintain gross margins in the new 41-45% target model, completely out of context and suggested some sort of cyclical disaster for the company in line with his short thesis.
Some points from the August 15th presentation,
-2017 production output will be up 150% from 400K lasers per month in January to 1 million in December, while headcount in the Sugarland, TX, fab will only rise 50%.
-100G manufacturing costs were reduced 40% from 2Q 2016 to 2Q 2017 and are planned to decline 40% again from 2Q 2017 to 4Q 2017.
Second linked author’s valuation,
My $125 stock price target is predicated on an 18x multiple applied to my unchanged 2018 EPS estimate of $7.00. Consensus of $5.75 is very conservative and has consistently been blown away. Despite the recent and sharp selloff following 2Q 2017 results and 3Q 2017 guidance, consensus for 2017 and 2018 actually increased. The company is sharply increasing output in 3Q and 4Q 2017 that is not reflected in consensus for 4Q 2017 and into early 2018. Also, Applied Opto is investing heavily in capacity expansion in 2H 2017 for rising 2018 production for existing and new customers, which is also not reflected in consensus.
I personally believe an 18x multiple is totally reasonable or too low relative to Applied Opto’s 2012-2016 five-year CAGR of 40%, plus growth of 85% or better in 2017, and likely growth in excess of 50% in 2018 and potentially much more. Further, despite competition, the company has become increasingly profitable and when it reported 2Q 2017 results in early August 2017 increased its sustainable gross margin target to 41-45%, the best in the history of the industry.
https://seekingalpha.com/article/4100904-applied-optoelectro…
Transcript to the last call, https://seekingalpha.com/article/4094704-applied-optoelectro…
Darrell- Sold my INFN at long last and put it in AAOI.