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Why AAOI Is Surging Today, And Will Again Soon

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Applied Optoelectronics (AAOI - Free Report) is back to being a Zacks Rank #1 (Strong Buy).  It was a Zacks Rank #2 (Buy) yesterday when I shot this video ( profiling it as an aggressive growth stock that should be on your radar.  The reason for including it yesterday was simple, the company raised guidance yet again.  Let’s take a look at the recent history of guidance increases and what the analysts are saying today.

Increase In Zacks Rank

The Zacks Rank is an algorithm of all the earnings estimates that are produced by the sell side analysts.  Whether it's Piper Jaffray or Goldman Sachs or DA Davidson, all the estimates are compiled together to form a consensus.  The Rank then looks at the earnings estimate revisions, and those stocks with the best revisions receive the coveted Zacks Rank #1 (Strong Buy).

When a company raises guidance, analysts are sure to follow suit and that is just what happened with AAOI today.  Yesterday it was a Zacks Rank #2 (Buy) but the new revisions higher helped push the stock up to a Zacks Rank #1 (Strong Buy).


Management lifted 2Q guidance to $1.31 - $1.36, and that is up from the previous range of $1.09 - $1.19.  The Wall Street consensus was calling for $1.15.  Revenue is expected to come in at $117M which is above the top end of the range which was set at $106M - $112M.

Previously the company had raised guidance for the quarter on May 4, when the consensus for EPS was at $0.99 and revenue expectations were under $100M.

The most recent increase in guidance was the fourth hike this year.  On February 23, the company increased guidance for 1Q17 and on January 11 the fourth quarter of 2016 was preannounced (a de facto guide higher).

Analysts Boosting Targets

 This morning a few analysts have come out with new price targets.  Not surprisingly, they are higher, some of them are much higher.  DA Davidson and Needham both increased their targets to $100.  DA Davidson moved their number higher by $5 from $95 and cited the company’s dominance in “hyperscale data centers” as the reason for increased optimism.

The Needham analyst pointed out a significant increase in gross margins from the shift to 100G.  They noted they are increasing estimates, but only to the most minimal amount they can until they can get details on the quarter.  Needham left the door open for even more upside for the next two-quarters and raised their target $15 from $85.

Yesterday, Piper Jaffray got ahead of the group and increased their price target on the stock to $90 from $85. 

Craig Hallum increased their target price today to $95 from $85.


It is hard to imagine that a stock that has raised guidance four times already this year is only trading at about 16x forward earnings.  The trailing 12 month multiple is closer to something you might expect at 32x.  The price to book is rather healthy at 4.9x, but that is below the industry average of 6x while the price to sales multiple of 4.5 is also below the industry average of 6x.

When I hear that gross margins are expanding, I first want to look at recent historical margins.  I see the operating margin for AAOI doubled (YES DOUBLED) from 8.1% in 4Q16 to 16.6% in 1Q17.  With the idea of margins expanding again a little above the operating line, it would be a safe bet to see those numbers move higher as well.

Follow Brian Bolan on Twitter at @BBolan1


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