It’s been a busy time for me lately, especially for being retired, but isn’t that the way it goes. I finally started to dig into my list posted here last week (you know, the one no one liked) but I got bogged down on the very first (#1 ranked) company because … well, I like it. So I spent the time I allotted for going through the entire list, studying just the first company. Since I’m new here, let me ask you: have you guys heard of it, or discussed it, I wonder?
I hadn’t heard of it. Maybe because 49% of the shares are owned by institutions. Anyway it has some of the characteristics favored around here. It’s a fast grower. It’s tech, but not real high tech, although they do build lasers and fiber optics components. It’s kind of new, started from scratch in 1997. It’s growing faster than Superman’s dog chasing WonderWoman’s kitty. It has gained a bit this year, about 500% give or take, but it’s been a violent ride on the old stock chart. I think because 1) the institutions got to this one before we did and the float is wee, and 2) I suspect, but don’t know, that the shorters have an entire sport built around AAOI shares. The good side of that is that share price has dropped a bit (along with all my holdings) in this … what do we call it … this Tech Share Shuffle maybe? I also suspect, but can’t prove, that a severe short squeeze may be in the cards in the near future. I wouldn’t own a company for that reason only, but it does my little heart a big favor when I see short squeezes erupt, whether I own the company or not. (OK, yes, I’d rather be one of the owners when the juice gets squeezed, but still, I’m a pretty nice guy.)
But I look at prospects a little different than most. I find lots of companies that I like, so what I really look for are things I don’t like. I look for things I can’t live with while being an owner of a company. Things I avoid like VOTE FOR SO’N’SO bumter stickers. I’ve only found a couple here so far, but maybe you folks can help look under the hood a bit more and see something I’m not smart enough to see. The company’s based in Texas, but the management team, going by names and photos (which I realizes sounds racist but again, I’m not, I’m a nice guy) all look Asian to me, and they have a sweetheart deal with the Chinese for income taxes and 2 subsidiaries are in China and Taiwan. Chinese people are great! I just don’t like their country’s securities practices and their securities laws. And you know how I hate to invest in Chinese companies. So is this one, or not? I Chinese CEO in panda-hide cowboy boots in Texas with a Colt 45 in his holster is still a Chinese CEO, am I right?
The second question stems from 29% of their revenue coming from the cable tv industry. Is cable (meaning actual fiber-optic cable, not the cable tv industry) dead, or will the continued explosion of internet traffic mean the continued explosion of the use of fiber-optic cable? While I could make an uneducated guess and be comfortable with it, in fact I don’t know. The good angle on the question is that their applications and design expertise for data centers appear to be taking over sales from the sales to the ctv industry. I suppose someday something will replace light as the fastest and most accurate mode of transmitting data too, but what is it? And when? Again, I’m not a comms engineer and I simply do not know. Some nano-critter-something, I suppose?
So please surprise me, whack me upside the head with bad news, rumors, dirt, scandals, hooker stories, something I’ve missed. Otherwise, I’m in. “Yeehaw!” or whatever they say in China or Taiwan. (Maybe “Yeehaw!” but I’m just guessing here.)
Anyway, on to the show:
AAOI Cpplied Optoelectronics, Inc.
Sugar Land, Tx
Founded: Febr 1997
What they Do
Design, develop and manufacture advance optical devices, packaged optical components, optical subsystems, laser transmitters, and fiber optic tranceivers.
These products are used in fiber optic communications equipment for FTTH (Fiber-to-the-Home), point-to-point telecom, datacom and access networks, and systems supporting cable television (CATV), network infrastructure.
Engineering and manufacturing plant locations:
• Sugar Land, TX [HQ] - Laser chips & optical components
• Taipei, Taiwan - Optical components & sub-assemblies
• Ningbo, China - Optical components & optical equipment
• Data Center
• Pluggable Modules
• Wireless Analog lasers
• Carbon Dioxide
• Hydrogen Flouride
• Hydrogen Sulfide
2017 Q1 Results
Revenue increased to $96.2m, up 91% from 2016 Q1 and 13% from 2016 Q4.
GAAP Gross margins increased to 43.1% from 28.3% in 2016 Q1. Non-GAAP GM increased 43.2%, up from 28.3% in 2016 Q1 and 38% in 2016 Q4.
GAAP net income increased to $19.8m ($1.00 / dil sh) compared to net loss of $1.3m ($-0.08 / sh) in 2016 Q1, and $14.2m ($0.77 / dil sh) in 2016 Q4.
Non-GAAP net income increased to $21.8m ($1.10 / dil sh), compared with non-GAAP net loss of $0.6m ($0.04 / sh) in 2016 Q1, and non-GAAP net income of $15.5m ($0.84 / dil sh) in 2016 Q4.
2017 Q2 Outlook
Non-GAAP gross margin 41%-42.5%
Non-GAAP net income $22.2-$24.3m, non-GAAP fully diluted earnings per share $1.09-$1.19, income tax rate of approx 20.5%.
AAOI owns Global Technology, Inc. in China as a wholly owned subsidiary which has been granted by China, preferential tax concessions for 3 years as a national high-tech enterprise in 2008, which has been extended 3 times to date. The latest extension expires in September 2017.
Revenue is recognized when the product is shipped and title has transferred to the customer. (I like Simple.)
Revenue Segments (2015)
Data Center 64.9%
turned positive in 2016 $0.40
2016 Q4 FCF/S $1.11
Balance Sheet Highlights
Working Capital $127m
Total Assets $368m
Total Debt $29m
2016 $49m ($25m in Building)
2017 Q1 $6m ($1m in Building)
7 analysts, none from huge firms
Risks & Concerns
• 28% of revenue is from Cable. What is the lifespan of the ctv industry?
• R&D cost is expected to increase in dollars (but decrease as % of cost)
• Demand is seasonal with Q4 demand highest and Q1 demand lowest.
• Foreign currency risk - sales in China and Taiwan subsidiaries are made in respective local currency