AAOI

[putnid]

I’m just gonna slide past the personal remarks and get back to looking at Applied Optoelectronics (AAOI) as an investment. Thanks, Dan, for bringing this company to my attention.

I’m rather intrigued by the profit opportunities within this amorphous/ill-defined sector I’ll loosely label telco equipment/opticals division. Yeah, that’s a bit silly but the sector truly is hard to define. It encompasses long-haul systems, short-haul metro, data centers, cable communications, etc. This technology “space” moves at the speed of light, but it is CYCLICAL. I can’t emphasize that enough. Unfortunately, for us investors, different applications move to their own beat, overlapping sometimes, sometimes not. For example, Infinera enjoyed heady stock price growth at a time when it was heavily involved in a multi-billion $$ transatlantic cable project. Those types of projects come and go with long gaps in between. Infinera execs saw the end coming and moved to bolster its metro operations and other alternatives. Yes, there will be growth. There will be significant growth, but the how, when, where aspects are difficult to discern. I hold a moderate position in INFN. The shares are a bit soggy (i.e., underwater) at this point, but INFN has been a money-maker for me over the past few years. It all depends on one’s exit/entry points.

I also established a position in Acacia Communications (ACIA). It’s a significant player in the optical switch space (like AAOI). The share price has plunged from $128 to $44. Oh, yeah, that leaves a mark. However, I just started buying recently when I was roused from slumber by the wails of badly burned investors. What I’ve learned intrigues me. It appears that ACIA offers fine products (like AAOI). Why the plunge? Because telcos are transitioning from 4G systems to 5G systems and the faster optical switches will come into high demand once the telcos begin moving en masse. Hasn’t quite happened just yet. But it will. The other huge factor is that China (the world’s 2nd largest economy) has been upgrading its telecommunications systems but, in typical Chinese fashion, work progresses on a province by province basis with billion dollar budgets deployed sporadically. Yeppers, it’s a challenge looking for signs of impending growth. One indicator of the complexity is the extreme range of analyst opinions. Some say buy, strong buy. Some say sell, strong sell. Ya gotta be able to sort this stuff out independently for yourself.

And that’s the point I’m trying to make: If you’re a die hard buy and hold sort, this sector ain’t for you. If you hate charts and hate technical analysis, this sector ain’t for you. If you don’t have the time or interest to digest all sorts of technical data and analyst opinions, this sector ain’t for you.

This sector suits me just fine because I am who I am. I have the time and the curiosity to try to figure out what’s happening in the sector. I’m fascinated by technology. Sure, there’s lotsa risk, but the rewards can be substantial, too. I’m also not an idiot. I am buying/selling in small increments. No big bets for this boy in such a complicated sector.

And that’s what makes a market.

[RaptorD2]

I’m finding your request for disagreement and your reaction when someone disagrees to be incongruous. And I’m also of the mindset that whenever one’s words and one’s actions conflict … believe the actions.

Hi MrTBS,

I want to say there are a lot of things going on here that you aren’t aware of, but I find myself between one of those metaphorical rocks and hard places. I know that sounds cryptic and I wish it could be otherwise. But maybe you can understand that there are other considerations here more important than your opinion of my actions, so I’ll just say that I’m okay with your judgement and don’t mind being further judged by my actions. To the extent that judgement is necessary, your “mindset” sounds reasonable to me. Happy investing!

Dan

[buynholdisdead]

Putnid,
That was a great post. But I wouldn’t put AAOI in the Telco space. A very small portion of their Revenue comes from the Telco space. The majority of their Revenue comes from the Web 2.0 space which is in the Data centers. With their next largest customers in the Cable industry. Its an interesting company that is vertically integrated, which they claim will give them better margins. Their gross margins are in the mid 40’s while Acacia is in the low to mid 50’s. I would say though that AAOI has respectable margins because most companies in this space are in the 30’s.

Their 3 biggest customer are FB, Microsoft, and Amazon. That is why they are growing so fast. These companies are getting bigger in the Data Centers. Since a lot of countries will not let data from their countries be stored anywhere else but their countries this is going to make these companies build Data Centers in each country which will make AAOI more profitable as they grow these Data Centers out. The reason they are lumpy is because it is seasonal. Also in their last earnings one company was over 50% of revenue and another was over 30%. One of the top 3 did not buy very much. That is concerning and does put a layer of risk on the company. Although they did in the last quarter pick up some new customers.

They are producing products for the 40 gig market and now the 100 gig market. Their biggest margin product is the CWDM modules. (Coarse Wave Division Multiplexing). As Bob stated, This company is nothing like Infinera. They produce modules that go into any box and since China is growing they can do business there also, which Infinera can not. The reason that the Data Centers are going with CWDM, instead of DWDM, is because CWDM is cheaper, runs cooler, and takes less power. So the technology works because they are sending the data across a smaller geographic area. Usually less than 100 miles. AAOI claims to be able to make their CWDM product the cheapest of any supplier.

That’s all I have for now.

Andy

[putnid]

That’s all I have for now. - Andy

And that was quite a bit, Andy! Much appreciated. Indeed, I was quite sloppy in describing the “space” AAOI plays in (and the spaces all the companies I mentioned play in). I think of this “sector” as a large array of Venn circles, distinct yet overlapping. I don’t have any in-depth knowledge. I’m simply fascinated by the way data are transmitted, used, stored and distributed globally. The pace of the technological growth is breathtaking.

I shamelessly rely on the insights provided by those who work in the “sector”. Expert insights are incredibly valuable. I hope you’ll always stick around to share your expertise.

[XMFCochrane]

And that’s the point I’m trying to make: If you’re a die hard buy and hold sort, this sector ain’t for you.

I think that’s the lesson I took away from Infinera - that stocks more cyclical in nature are not meant for buy-and-hold investors. While Saul’s board has definitely pushed to being more critical of my current holdings, I still look for stocks that I can hold indefinitely and I definitely have a slower trigger finger than Saul and others around here possess.

That’s why I’m reluctant to go back into this space. I have no confidence in my ability to decipher these cycles. I’m sure there is lots of money to be made but I don’t feel like I’m the one who will make it.

Matt
MasterCard (MA), Nestle (NSRGY), PayPal (PYPL), and Verizon (VZ) Ticker Guide
See all my holdings at http://my.fool.com/profile/CMFCochrane/info.aspx

[RaptorD2]

First of all, thank you very much for the kind words. Second, let me explain the “too complicated” comment.

Hi there, captain,

You’re welcome. You don’t need to explain the “too complicated” comment. First, I understand it. Second, I don’t disagree with your philosophy at all.

Someone just mentioned that they saw my request for disagreement and my actions as conflicting. But maybe it’s not all about me. I think (tell me if I’m mistaken) that you and I both can, at times, be somewhat confrontational. It’s in our nature. Would you disagree?

I do admire your investing acumen. But as you know, I also don’t follow you around the internet, chasing all your thoughts to agree or disagree. We just happen to frequent some of the same discussion boards, and I enjoy hearing your thoughts.

What I’m not sure you realize, is that I don’t disagree with your philosophy at all–for you. I’ve used the process myself, and other than the fact that my net was considerably wider than yours (no judgement attached whatsoever, just a difference) my methods were quite similar.

Here’s the thing. Since I don’t seek out your posts any more than you do mine, I didn’t know several things about your current investing strategy until recently.

I didn’t know that you only used 50-some stocks as your watchlist.
I didn’t know that you didn’t buy anything not on your watchlist.
I didn’t know that the tech meltdown affected you so much, and apparently(J) changed your mindset regarding the industry completely. (I thought it was your “specialty.”)
I didn’t know that you were going back to something resembling BMW-style investing.
None of the above are my business; they are only casual observations made during casual conversation.
I make no judgement about any of the above whatsoever, and hopefully never said anything indicating otherwise.

Yet you ask (sarcastically, I think) if you should change your entire investing philosophy and methodology because I mentioned that FB, for example, could be considered a bargain compared to many of its competitors. Heavens, where did that come from? (See points 1 & 2 above.) I certainly had no idea that it was “off limits.”

I’ve known you long enough - I think - to know a few things about you. One thing I think I know is that (also like me) you’re not much for the touchy-feely stuff. But surely we can discuss stocks without every casual comment, question or idea, being considered a challenge or confrontation. (Or, is that our destiny?)

You can be a challenge, Denny. Ask me how I know.

Dan

[putnid]

Some ancient Greek, with stone hammer and sharp chisel, carved Gnothi Seauton into the marble lintel at the entrance to the Temple of Apollo at Delphi. I wonder…was he pounding out an admonition, or simply offering sound advice?

You touched on a critically important aspect of investing: understanding one’s own self (Gnothi Seauton translates to “Know Thyself”). It took me four decades of investing experience to learn my limitations and abilities. Most lessons were fairly expensive, but valuable in the long run. Knowing one’s own risk tolerance is absolutely critical. Knowing one’s time constraints, analytical expertise, business acumen, gullibility, stubbornness, etc., etc. will help an investor steer clear of trouble. I consider myself fairly risk tolerant, but there’s no way I could handle buying on margin/leverage, or options trading. I know my limits.

I watched many investor friends risk a great deal during the dotcom boom only to lose it all and never return to the Market. Money matters are potent emotionally. The vulnerability may not even be within the investor but in the investor’s spouse. Investing is a tricksy business.

Consider yourself lucky, Matt, that you’ve come to know a bit about yourself as an investor. It will hold you in good stead.

[captainccs]

Dan, talking about touchy/feely, Saul gets upset when threads go off topic so I think it’s best (my new more mellow self is talking) to drop it.

But one thing is certain, the BMW Method had a very strong influence on me and while I’m not following the method, it left footprints all over what I do in investing.

Denny Schlesinger

[buynholdisdead]

Hi Putnid,

Indeed, I was quite sloppy in describing the “space” AAOI plays in (and the spaces all the companies I mentioned play in). I think of this “sector” as a large array of Venn circles, distinct yet overlapping.

You were not sloppy Putnid. You did great getting the conversation back on track. I agree that it is a large array of Venn Circles. They all are using the same equipment for different reasons. Long haul has the large pipe equipment to carry the big pipes around the world, the local carriers have the large pipe equipment at the back bone but then at the edges they will use CWMD. The data centers using CWMD at the backbone and some DWDM but cisco’s and Anet within. It all works together and moves the data around the world. The pipes keep growing with fiber starting to push the speeds faster and faster.

I’m simply fascinated by the way data are transmitted, used, stored and distributed globally. The pace of the technological growth is breathtaking.

Exactly, and that is what I am trying to capitalize on. I do not think it will be the equipment makers like Ciena and Infinera that will give us the big gains on our capital anymore. I think it will be companies like Acacia and AAOI that will be giving us the big gains. When I walk out to work everyday I grab a handful of these SFP’s, SFP+s and XFP’s. All to do my job. It is almost like grabbing a handful of skittles. This is what these companies do for the data. I am but one technician and there are thousand and thousands going out every day with the same handful of Optical SFP’s. Every customer’s circuit I put in needs two of these sfp’s, every facility order I do may take up to 12 or less of these sfp’s and every backbone order I do takes at least 4 of these XFP’s. I see the data, just trying to find the best way to capitalize on it.

I shamelessly rely on the insights provided by those who work in the “sector”. Expert insights are incredibly valuable. I hope you’ll always stick around to share your expertise.

Thank you Putnid, but I get it wrong, just trying to find the best way. I shamelessly rely on everyone for good ideas that I can capitalize on. That is the great thing about this board, All of us helping each other to meet our goals.

Andy

[RaptorD2]

So Jon, Andy, Matt, Thanks for the info. I’ve been trying to get a handle on the near-future market in AAOI’s niche, and have found a few clues, but no “answers.” And most clues seem unable to go past 12 18 months.

I’m beginning to think and you seem to confirm, that there are no real projections for such things as future buildouts of Big Data and Data Centers, is that fair to say? And at a glance it appears that making one’s own projection with any degree of accuracy, requires complete immersion in the industry, and that those projections are something that must be absorbed over time from the shadows more than learned from any few sources. Do I have that mostly right?

I don’t pretend to know Big Data (Paul, feel free to jump in here!) but would it be correct to think that only a very few organizations will ever likely build Data Centers in the near future, or is the market for big data so huge that many likely will?

I don’t mind cyclical, although this appears to be cyclical to a degree I’ve not experienced before. But I don’t have the inclination to immerse myself in learning fiber-optics construction techniques to project the market either, if that’s what it takes.

Methinks there aren’t many shortcuts to make up for lack of knowledge.

Dan

[putnid]

Thanks for the kind words, Andy. Much appreciated.

This comment of yours: “I do not think it will be the equipment makers like Ciena and Infinera that will give us the big gains on our capital anymore. I think it will be companies like Acacia and AAOI that will be giving us the big gains” intrigues me. Clearly, I have lots more to learn and pondercate. It takes a good bit of effort to understand the complexities of this vast infrastructure. Thanks for extending a helping hand.

[putnid]

Hi, Dan -

I thought your summary comments were on point. This “sector” is not for everyone. There are easier/safer investments available for those not willing or able to dive in deep.

[buynholdisdead]

Hi Dan,

I’m beginning to think and you seem to confirm, that there are no real projections for such things as future buildouts of Big Data and Data Centers, is that fair to say? And at a glance it appears that making one’s own projection with any degree of accuracy, requires complete immersion in the industry, and that those projections are something that must be absorbed over time from the shadows more than learned from any few sources. Do I have that mostly right?

I am not sure that you can understand the growth even if you are completely immersed in the industry. On the last CC for AAOI they didn’t even understand the growth in the industry. Here is a statement on what Stefan Murray, from AAOI had to say.

I don’t have any data on – I mean where the industry is in that transition. I can only speak to our numbers as I said, we’re seeing very strong results for 100-gig and 40-gig. 40-gig actually started with a higher base. So the growth rate there is less, 100-gig is growing very strongly. But I can’t really comment on the overall industry outlook, I don’t have that data.

That shocked me. I thought that he would have had a better answer than that. Other companies in the space seem to give a better answer to this question, but not always correct. I work for a local phone company and we skipped the 40 gig standard altogether. I have ran 100 gig circuits into the data centers for companies like FB and other big telco’s but mostly 10 gig and 1 gig circuits are going into the data centers.

A statement right after that by Stephan Murray.

Right now we’re basically shipping everything we can manufacture. So the growth rate is not dependent on demand its dependent on our ability to continue to ramp or manufacturing. So, we talked just a moment ago with Troy, he mentioned some of the figures that we had projected in terms of laser sales. I think you can draw some conclusions from there. But there is a limit to how fast we can increase our production capacity. So that’s really the limiting factor to the growth rate.

So they seem to be able to sell everything they have. That’s pretty interesting.

I don’t pretend to know Big Data (Paul, feel free to jump in here!) but would it be correct to think that only a very few organizations will ever likely build Data Centers in the near future, or is the market for big data so huge that many likely will?

This is my opinion and I could be wrong. I think all of the big data companies, Google, Fb, Amazon, etc will have their own data centers. Also I think their will be some small private data centers that will operate. Finally there will be data Reits that will be operated. For some reason the Telco’s do not seem to want to be in this market. I do not know if it is the cost of operating one but it seems it would be right up their alley.

http://www.datacenterknowledge.com/archives/2017/05/01/done-…

http://fortune.com/2016/11/04/centurylink-data-center/

I don’t mind cyclical, although this appears to be cyclical to a degree I’ve not experienced before. But I don’t have the inclination to immerse myself in learning fiber-optics construction techniques to project the market either, if that’s what it takes.

This is what I am thinking and if someone thinks different please speak up. I do not think knowing the construction is going to help anyone, what to look for is are they growing customer count, are they selling all over the world and is Revenue and earnings going up. Also if their margins start slipping it could be competition is moving in and they are cutting prices to keep market share. I was invested in Infinera and though I made a little money it wasn’t enough for the time invested. (One) of the many problems with Infinera is that they couldn’t get into China. I haven’t looked very deep into AAOI but if they are in the Data Centers, which we know they are, and in China then I would be very interested. They are growing very fast but is it sustainable?

Andy
Long ACACIA

[strelna]

I finally took a look at AAOI. It lasted 4 seconds, including the click. Short interest 46%. I am not averse to risk but capital preservation warns me against having that number strongly disagreeing with me!

[buynholdisdead]

LOL Strelna,
I haven’t bought any yet either because I am just looking at it. But if I was looking at the short interest I would prefer to look at it as 54% of the people agree with me.

Andy

[strelna]

That is true Andy but, while 54% agree, the remaining 46% are not passive, disinterested onlookers as implied, but strongly disagree. Therein lies the problem: low market support for a discovery would be extremely welcome if real value was evident (the wonderful prospect of the double-whammy of company growth + multiple growth). But here, 46% are taking the view that the dreaded reverse double-whammy is likely enough actively to take a short position!

[upndn]

while 54% agree, the remaining 46% are not passive

Don’t forget the shorts have created an additional 46% long shares/shareholders.
So longs are more than 54%…

JT

[SaulR80683]

Unfortunately the AAOI thread is now 40 posts long with a large proportion of the posts full of personal animosity. Let’s drop it, and get back to our lives and to investing.

Thanks,

Saul

[RaptorD2]

Thanks Andy & Jon,

That’s just what we needed.

I think there’s money to be made here by someone, but not me. I still think the revenue here will be volatile on a scale unfamiliar to most investors, and that is most likely also tied to the high short ratio. AAOI obviously has a nice backlog of orders and foresee a good year coming up (already half-baked into the price, it appears) but beyond that, I suspect lies a large amount of uncertainty.

My other concern so far unmentioned, is that I think the fittings, parts and equipment supplied by AAOI for any sizeable data center, while totaling a sizeable sum in dollars, is a very small portion of the total cost of building a data center. It seems it would take a huge project list, spaced somewhat uniformly, for any meaningful degree of sustainability. Since technological change is moving at an increasing pace, that degree of harmony is most unlikely, prompting periods of boom & bust in this industry and requiring astute investors well versed in the field to have a good chance of worthwhile profits, and for most investors the risk/reward ratio is much too high.

Thanks so much for sharing.

Dan

[buynholdisdead]

Hi Dan

My other concern so far unmentioned, is that I think the fittings, parts and equipment supplied by AAOI for any sizeable data center, while totaling a sizeable sum in dollars, is a very small portion of the total cost of building a data center. It seems it would take a huge project list, spaced somewhat uniformly, for any meaningful degree of sustainability. Since technological change is moving at an increasing pace, that degree of harmony is most unlikely, prompting periods of boom & bust in this industry and requiring astute investors well versed in the field to have a good chance of worthwhile profits, and for most investors the risk/reward ratio is much too high.

Thanks so much for sharing.

Dan

I think you are correct on this and is one of the reasons I want to make sure any company I am invested in this space is also able to sell into China. While it will be volatile that should help.

Happy Investing.

Andy