Do I sell AAOI?

Investment Analysis Clubs Saul’s Investing Discussions
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First, let me thank those who pointed me in the direction of AAOI (Applied Optoelectronics). I thank you bigly!

Having read several comments relating to AAOI and the optical networking sector in general, I added a position in AAOI. I already had positions in the sector and feel quite bullish (long-term about the sector’s prospects). On July 10, I established a position in AAOI at $65.86. It closed today at $90.00. That’s an impressive 8-day gain. Me likes.

Here’s the rub: At this point in time, 61.57% of the float shares are short. That’s 10,376,800 shares short. I’m not seeing the reason. I don’t believe AAOI is all that overvalued (as compared to so many of the current favorite cult/momo stocks). From a fundamental analysis basis, AAOI has lots of room to grow. I don’t get it. Why all the negativity (61.57% short ratio)?

I am genuinely perplexed. I can sell today and book a healthy profit. I can ignore the pessimists and hold for the long haul. Is the glass half full or half empty? I am genuinely perplexed.

What sayest you?

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AAOI - wow!

please give me one of those?

may not be helpful, but i was scanning seeking alpha and a RJ report - i know zip on the stock - but the short activity seems centered on competition:

Real or Imagined Competition: Applied Optoelectronics shares have been dogged by
speculation of share loss and increased competition that management refutes. While we
believe competition is increasing within an expanding market, the fears appear
exaggerated. MACOM and private companies have created much of the noise. AOI gains
advantages via vertical integration, an increased level of automation, and a breadth of
products. AOI believes it can maintain its leading share in web scale accounts at 100G. We
envision increasing competition, in part as telco focused suppliers seek QSFP28
opportunities considering the pause in China. We believe AOI’s strong gross margin
demonstrates limited competitive threats.

that’s what this analyst says - i have ZERO idea if it is true or not…

the link is also tied to slowing china spending for other optical stocks (not much exposure here apparently) and heavy customer concentration tied to data centers

again, i know zip…

fwiw - hope this helps

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I am genuinely perplexed. I can sell today and book a healthy profit. I can ignore the pessimists and hold for the long haul. Is the glass half full or half empty? I am genuinely perplexed.

What sayest you?

If you are truly perplexed then you might want to sell and not look back. I think there are a lot of great other places for your investment dollars.

Chris

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At this point in time, 61.57% of the float shares are short.

Well, one of two possibilities:

  1. Something is wrong that you do not recognize.
  2. Nothing is wrong and you are well positioned to ride a great short squeeze.

Do whatever allows you to sleep well at night.

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I agree with GauchoChris. If you are truly perplexed, there are a lot of other great places for your investment dollars.

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I am genuinely perplexed. I can sell today and book a healthy profit. I can ignore the pessimists and hold for the long haul. Is the glass half full or half empty? I am genuinely perplexed.

What sayest you?

You probably should figure out what your tax obligation will be per share.

b&w

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Every little bit helps! Thanks, OneEyeBirdRtns!

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“You probably should figure out what your tax obligation will be per share.” - b&w

I do all my investing/trading in tax-deferred accounts. Makes life so much easier.

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I can’t tell you what to do but here is a little information that I wrote up that could help you.

AAOI is a manufacturer of optical transceivers for the Data Center, Cable companies, FTTH (Fiber to the home), and the telecommunications market. They make digital and analog transceivers that allow a customer to send data along a fiber stand. At this time they produce transceivers that allow a customer to transmit at 2.5gig using their Gpon or Wdm Pon product. This product is used for FTTH. The Gpon structure allows customers to share the bandwidth on a splitter (much like a hub) the WDM pon product splits the light waves and allows each customer to receive their signal over different Frequencies or Wavelengths. I am not going to go deeper into this technology but it is something that telecommunications and Cable companies are using to provide service to their customers . This is a small part of AAOI’s business. They assumed they were going to win a large contract with Google, ( this is my assumption since they stated that they were going to get a large contract from an unnamed customer but that customer decided not to go through with the order), but that fell through.

Their next product they produce are the 1 gig transceivers, 10 gig transceivers, 40 gig transceivers, and 100 gig transceivers that are just starting to come on line. They produce these for the Data Centers and some Telecommunication and Cable companies. Their biggest customer in the Data Centers is Amazon with Microsoft a distance second. They have won a third Hyper Data Center customer which I believe is Facebook according to the last Conference Call. They also have smaller data center customers and they have been growing the data centers at 77% in 2015 and 82% in 2016. This is the sector that they have been growing most of their revenue. The Data centers have been upgrading their links from 40 gig to 100 gig at this time. While 40 gig is still most of their product delivery the 100 gig product is starting to come on strong. They delivered 62% of their revenue in 40G and 30% in 100G. They also produced a 200G product and are working on a 400G product. As a product ages its ASP starts to decrease. So the 100 gig product has a higher ASP than the 40 gig. The 100 gig product is helping their Gross Margins, which will be evident in the numbers I show later. I like companies that are situated in the Data Centers because that is where the growth is. The datacenters are upgrading their equipment and links ever 3 years while the Telecommunications and Cable Companies are only updating their links every 7 years. Every port in every piece of switch, router, or transport equipment will need one of these transceivers.

They are very concentrated in the Data Center so if their is a hiccup they will be slammed very hard. But as long as the Data Centers keep growing they should do well.

Andy
Long AAOI

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Nice write up.

A note, and caveat.

AT&T is moving to all data center structure and will be mostly there by 2020, with an all IP based network by 2025 or sooner.

If it were up to the CEO, there would be zero bits of data passed outside of the IP network.

The caveat.

AT&T has a hundred years experience squeezing vendors.

Cheers
Qazulight

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Thanks Qazu,
At&T stopped selling 4 wire circuits(isdn, 56kdata, ie) about a year ago I believe. Verizon and Centurylink have sold off their Data Centers. Everyone is trying to find out how to make more money in this business.

I think it is smart for AT&T to move away from their TDM network, ethernet is the future and eventually everyone will be moving in that direction. The faster the better.

Andy

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It is more than just the TDM, all of the switching in the Central Offices is moving into virtual machines.

It is getting so weird that within the big company data products, there can be entire networks of VPNs with virtual servers and virtual routers existing in virtual machines scattered across multiple server farms.

In other words, a non existent router in a non existent private network can get a bad software load and cause a very existent business failure.

Cheers
Qazulight (Your virtually unemployed Comm Tech)

Note: I still draw a wage, just don’t do much, its like virtual work.

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Hi Qazu,

It is more than just the TDM, all of the switching in the Central Offices is moving into virtual machines.

Your right maybe I should have said digital. Some of the companies are trying to hold onto all of the old switching but the ones that let it loose and remake themselves are the ones who will come out on the other side. As I have said this is a huge shift like from mechanical switching to digital switching. I am handing off drops to customers that are unmanaged, just a 1 gig to a 100 gig drop directly to the customer.

In other words, a non existent router in a non existent private network can get a bad software load and cause a very existent business failure.

Or a piece of equipment can cause a broadcast storm and bring down a large piece of the network. I am trying to figure out how to play this and I think software is one way but I also think the makers of sfp’s could be the other way. Because every circuit installed needs multiple sfp’s.

Andy
Building out the backbone and running circuits to the customers.

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I say: take the profit!

Here’s the thing: you speculated on a company with a 62% short position without knowing its reason. You are up over 36% in 8 days and still no wiser about the short position.

Encouraged by others, with style and panache you successfully crossed a river by leaping from the back of one crocodile to another just like James Bond!

On the other bank, we all applaud, lost in wonder at this feat of daring and set off to the shallow, fast-running ford which they say is some distance upstream.

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Hi Putnid,

I’m glad you’re enjoying the ride. Since I started this mess, I figured maybe I should weigh in even if I don’t know the industry well.

In my experience, when this situation occurs (price rising exponentially while shares short is growing for unknown-to-me reasons) the reason is one of two things:

First, obviously, is the chance that someone - someone with very deep pockets, or LOTS of someones with insider knowledge- know(s) something I don’t. For such a visible company in such a well-watched industry, setting the niche on fire by the numbers, I personally find this unlikely.

Second, the one that concerns me more, is the idea that the same numbers setting the niche on fire, are untrue. AAOI’s growth is hard to believe, and for such a new company, well … this gets back to my thoughts on investing in China. You can’t call them up and ask for a look at the books. And neither can U.S. regulators. (They can ask, but without authority, and it would be 99.9999% likely to be to no avail.)

So the biggest question in my mind is, “Did they cook the books?” It’s happened before, but regardless of what the shorts or the pundits proclaim, 1) I’ve seen no evidence for that argument, 2) I have to wonder why, when they are obviously profitable, they would feel compelled to do so, especially when 3) Every person on the management team has to know they would be finished in business of any type and 4) would be required to forfeit all gains in the scam.

But I wouldn’t listen to a poster of amateur investors on a discussion board to answer such a daunting question. I would, instead, decide how much the money in question means to me. For every $1k you invested, you’re sitting on almost $700 in gains. If you invested, say, $10k in AAOI, just for a number to discuss it with, the question becomes easier to answer.

I’ll assume you invested $10k just because it’s a nice, round number, and … ahem … I might have done just that on Monday and despite rumors to the contrary, I don’t consider myself crazy. :slight_smile: There are innumerable possible outcomes financially, but in the realm of basics, only a few (meaning the numbers included, while meant to be totally feasible, are total WAG’s.)

Some possibilities by the end of 2017:

  1. Who cares? Sell now.
  2. The company keeps growing as indicated and expected through the end of the year as a minimum. Stock raises another 75%. (Important: See note at the end.)
  3. Similar to above, but shorts get crushed. Stock up another 150% minimum.
  4. The company has a terrible secret that gets outed 2 weeks from now, with the stock up another 10% when the news hits the fan. Hello, Mr. Maddoff, it’s nice to meet you.
  5. Technical glitches create shortage of finished inventory, company loses market share. Stock price drops 40%.
  6. The #!*_@ shorts were right, the freakin’ inside traders and traitors cash in while the stock goes to zero.

Now you may think these are all unreasonable, but I’ve seen every one happen. So while the numbers may be (way) off, please realize that all the scenarios are absolutely possible as far as we know.

Scen-		
ario	G / (L)	Comment (Question)
1	7,000	Bingo! (Way to go!)
2	18,900	Woo Hoo! (How will this change your life?)
3	43,350	Cha Ching! (But did you sleep well this year?)
4	11,000	Before you sell - Yikes! (How fast can you sell?)
5	200	Again?  (How fast can you sell?)
6	(10,000)Crap! (Why didn't you sell?)

A great investor could come up with a lot more scenarios, I realize. But as far as the results I think this covers all likely outcomes except for the possibility of a wild, unlimited upside and if that happens, we’ll both laugh at the annual nuthouse frat party.

Forget the story for a minute. Look at the numbers. Will any outcome change your life? Would any be absolutely unacceptable? Would your spouse kick your a$$ out if #6 got the call? I truly hope this helps a little, I know it can’t be much.

In spite of great places like this one to discuss investments, the truth is that Done well, Investing is a lonely game.

Dan
long AAOI

----------> Note: AAOI just raised guidance–again. Analysts can’t keep up. <-----------------
https://seekingalpha.com/article/4087850-aaoi-surging-today-…

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I say: take the profit! Here’s the thing: you speculated on a company with a 62% short position without knowing its reason. You are up over 36% in 8 days and still no wiser about the short position.

Encouraged by others, with style and panache you successfully crossed a river by leaping from the back of one crocodile to another just like James Bond! On the other bank, we all applaud, lost in wonder at this feat of daring and set off to the shallow, fast-running ford which they say is some distance upstream.

Hi Putnid,
I have to start by saying that I don’t follow AAOI, I don’t know anything about its business prospects, etc. However, I have to agree with streina here (see above).

Why? My experience with battleground stocks with lots of shorts is that the shorts are often at least partly correct.

For example, consider Twilio. Hit $71 last September (3 months after its IPO). A lot of people said overpriced and shorted. Down to $30 by November!!! That’s $30 from $70 ! Enthusiasts continued to like it. Where is it now? Eight months later in this booming tech market? Still at $30 after being as low as $23-$24.

Or the most famous example: BOFI. Got as high as $144 (pre-split, which is $36 roughly at current prices). Then got hit by shorts in October 2015, almost two years ago. I had a very big position which I had a huge profit on, and sold out quickly at $110 to $115 as I remember. That was roughly at $29 at today’s prices, and I reinvested the money in other stocks.

Many very smart people on the BOFI board swore the shorts were wrong, said nothing was proven against the company, refused to consider the short articles, etc. The price eventually got as low as $13 or $14 and is currently at $24.46 ($98 at the old price). The holders have held for almost two years now and are still 16% below where I sold, and 32% below the old high, in a market that has been rising fairly steadily. They still maintain that they were right and that they will be vindicated. They may be right. I don’t know. But here I am, up 46.5% just so far this year, while Bofi has gone nowhere.

What I’m saying is that Twilio and Bofi were both battleground stocks. Sometimes battleground stocks do very well (amazon), and often they do poorly. But 62% short is an enormous amount and that would make me worry that they know something I don’t know. I don’t know the eventual outcome. It could be the mother of all short squeezes or it could be a stock collapse like TWLO and BOFI. A short position of that size though has to be professional shorts who have researched it down to the last comma, and not a few silly retail shorts. There are plenty of great stocks out there that aren’t battleground stocks. If I was you, I’d go for one of them. Remember, as I said earlier, I don’t know anything about the merits of this particular stock or company.

Best,

Saul

For Knowledgebase for this board,
please go to Post #17774, 17775 and 17776.
We had to post it in three parts this time.

A link to the Knowledgebase is also at the top of the Announcements column
that is on the right side of every page on this board

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PS - As streina was saying, staying in a stock with a 62% short position is as daring as crossing a river filled with crocodiles. You made it once, but do you want to go through life repeatedly trying your luck like that?

Saul

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Encouraged by others, with style and panache you successfully crossed a river by leaping from the back of one crocodile to another just like James Bond!

On the other bank, we all applaud, lost in wonder at this feat of daring and set off to the shallow, fast-running ford which they say is some distance upstream.

hahaha awesome

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… still waiting for the other shoe to drop with AAOI.

Signed,
Guy who got out at $78 and is still kicking himself

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Sorry, putnid, I transposed a number somewhere. I thought I read that you were up almost 68%+. My bad. I hope whatever decision you make is profitable for you.

Dan