Applied Optoelectronics Cuts Sales Guidance; Raymond James Remains Bullish

Applied Optoelectronics Inc AAOI lowered its third-quarter revenue estimates as part of an earnings pre-announcement.

What Happened

Applied Optoelectronics said it has identified a particular issue with some of its 25G lasers within one specific customer environment. The company and its un-named client mutually agreed to pause shipments of transceivers given its inferior quality. As such, management felt it prudent to revise its third quarter revenue forecast from a range of $82 million to $92 million to a new range of $55 million to $58 million.

Why It's Important

Applied Optoelectronics attributed its poor outlook to issues related to its 25G lasers "within a specific customer environment," Raymond James' Simon Leopold said in a note. The analyst believes the un-named client is likely Facebook, Inc. FB and management indicated it not only found a solution but shipments to the client resumed.

On one hand, the production does reduce investor confidence and patience and the failure to ship products naturally presents a scenario of market share loss, the analyst said. At the same time, the competitive environment remains favorable for Applied Optoelectronics as its competitor Innolight will have trouble in the U.S. market from China tariffs and Intel Corporation INTC's production guidance of one million units in 2019 represents just 11 to 13 percent of the total market.

Leopold downgraded the stock from Strong Buy to Outperform, with a price target lowered from $51 to $40.

What's Next

Applied Optoelectronics has demonstrated a pattern of troubles over the past few years but at the end of the day the announcement is unlikely to have any impact to 2019 estimates. The stock's valuation remains attractive and Raymond James's $40 price target is based on a 12 times multiple (prior 16 times) on 2019 earnings which factors expectations for better growth versus the S&P 500 index with execution risk, the transition from 100G to 40G, customer concentration concerns and price compression.

Shares of Applied Optoelectronics were trading lower by more than 12 percent Friday to $24.90.

Related Links:

What Analysts Like In Applied Optoelectronics' Q2

Applied Optoelectronics Has Product Quality, Pricing Concerns, Loop Capital Says In Downgrade