Bull of the Day: Applied Optoelectronics (AAOI)

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When identifying the Bull of the Day, I run a few models through our database to narrow my universe of potential companies. Two of the biggest factors in my search are Zacks Rank, and the consensus estimates revisions. Today's Zacks Bull of the Day, Applied Optoelectronics ( AAOI ) has a Zacks Rank #1, and their estimates have more than doubled after their most recent earnings report, and updated revenue guidance for Q1 17.

This Zacks Rank #1 (Strong Buy) designs, develops and manufactures advanced optical devices, packaged optical components, optical subsystems, laser transmitters and fiber optic transceivers. The company's products are used in fiber optic communications equipment for FTTH, point-to-point telecom, datacom and access networks and systems supporting cable television, network infrastructure. Applied Optoelectronics, Inc. is headquartered in Sugar Land, Texas.

Recent Earnings Data

The company reported Q4 16 earnings results on February 23 where they beat both the Zacks consensus earnings and revenue estimates for the third consecutive quarter. Highlights of the report include; Revenues up +60% year over year, and up 21% sequentially, GAAP gross margins improved from 29.5% in Q4 15 to 38% in Q4 16, and GAAP net income rose by +425% when compared to the year ago quarter. The big area for growth was the data center (DC) segment which saw revenues grow by +76% year over year, and +28% sequentially. According to management, Amazon accounted for almost all of the revenue growth during the quarter.

Q1 17 Improved guidance

Management announced some improvements in their Q1 17 guidance; Revenues are now expected in the range of $87 million to $91 million, above the previous estimate of $75 million. Non-GAAP gross margin in the range of 38% to 40%, above the estimated 38%. Non-GAAP fully diluted earnings per share (EPS) in the range of $0.80 to $0.88, ahead of the expected $0.79.

Management's Take

According to Dr. Thompson Lin, founder, president, CEO, " AOI achieved another record year driven by strong demand for our market-leading datacenter products and continued execution by the AOI team. We believe our record performance further demonstrates our growing market share in advanced optics and our team's ability to generate manufacturing efficiencies that lead to margin improvement. Our ability to internally manufacture lasers and light engines provides us with cost-leadership advantages, a faster time to market, and the ability to quickly scale to demand. Looking ahead, as the 100G transition accelerates this year, we see the opportunity to build on our momentum and expand our market leadership ."

Price and Earnings Consensus Graph

As you can see in the graph below, the stock has had a great run in 2017, and future expectations are rising just as fast.

Applied Optoelectronics, Inc. Price and Consensus

Applied Optoelectronics, Inc. Price and Consensus | Applied Optoelectronics, Inc. Quote

Earnings Estimates Increase

Due to the strong annual and quarterly results, and subsequent increased revenue guidance, estimates for Q1 17, Q2 17, FY 17 and FY 18 have all seen significant upgrades over the past 30 days; Q1 17 more than doubled from $0.35 to $0.78, Q2 17 rose from $0.44 to $0.78, FY 17 leaped up from $1.78 to $3.14, and FY 18 also more than doubled from $1.61 to $3.69.

Bottom line

Applied Optoelectronics has seen continued revenue growth in both data center optics and margin expansion. This was seen in 40G Datacom strength, accounting for 74% of data center revenues, and Amazon's adaptation of AAOI's data center. These better than expected revenue areas caused management to increase revenue and EPS guidance for Q1 17. Lastly, management was able to improve their cash reserves from $40.7 million in December of 2015, to $52 million as of December 31, 2016.

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The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

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