Applied Optoelectronics Inc (NASDAQ: AAOI ) has been a very troubled name. AAOI stock popped up on our radar when shares soared from sub-$10 in mid-2016 to more than $100 just 12 months later. However, that was the peak for Applied Opto stock as it then cratered more than $70 per share to $30, a fall of more than 70%.
So surely, some are wondering if now is the time to pull the trigger and scoop up AAOI stock.
About a month ago, management set a firm date for earnings. The quarterly results will hit the wires on February 21, assuming the company sticks to its current plan. However, unlike the previous few quarters, the announcement did not follow a downbeat pre-announcement, something investors had gotten used to. That's got some investors optimistic that the results might not be bad.
For the quarter, analysts expect earnings per share of 83 cents and revenue of $85.5 million. This would represent year-over-year sales growth of less than 1% and a 1-cent-per-share decline in earnings. Notably, three months ago, analysts were looking for 96 cents per share from the company. So clearly expectations are in decline. When looking at the chart though, that's not much of a surprise.
Applied Opto stock has suffered over the past few quarters as demand in China has tempered. Margin pressure from tougher competition hasn't been helping either. Pressure on sales and profitability is never a good sign, especially for a company like this.
Valuing Applied Opto Stock
Applied Opto stock is still in fiscal 2017 and currently trades at just seven times 2017 earnings. That's a pretty low number considering forecasts calling for 48% sales growth and more than triple the earnings AAOI had in 2016.
So what gives? Well, perhaps the most obvious problem is 2018. Analysts expect earnings per share to fall from $4.55 this year to just $3.44 next year. While it's still much better than 2016's earnings of $1.39 per share, it also marks a decline of more than 24%. In addition to the drop in earnings expectations, forecasts only call for a 1.6% gain in sales.
In AAOI's case, we have slight revenue growth and a big decline in earnings. That doesn't bode well for margins either, as the bottom line is declining despite expectations for a stable top line. On top of that, we don't know if analysts' estimates are low enough.
Currently, AAOI stock trades at 9.3 times 2018 earnings. On the plus side, this is still a pretty low valuation. But the business is volatile and as we've seen in the past, that puts the stock at a discount. For instance, look at Micron Technology, Inc. (NASDAQ: MU ). Shares trade at roughly 4 times earnings despite analysts calling for strong growth in 2018 and following an incredible 2017. In fact, that goes for stocks likeApplied Materials, Inc. (NASDAQ: AMAT ) and Lam Research Corporation (NASDAQ: LRCX ) as well.
The bottom line? When the business is volatile, the stocks come at a discount. In many cases, we see the opposite is true as well. Many blue-chip stocks may not have the strongest growth, but they tend to come with premium valuations simply because their businesses are dependable.
Trading Applied Opto Stock
AAOI stock is down more than 70% from its highs and just hit 52-week lows last week. Some investors might be considering overlooking its questionable reliability in lieu of its low valuation and possibly attractive stock chart. Below are two charts, the first a long-term weekly and the second a one-year chart.
Click to Enlarge
Click to Enlarge
As you can see in the long-term chart, the bounce near $29 could ultimately act as support for AAOI stock. As promising as this setup looks though, investors need something to happen first. On the short-term chart, we can see the "descending triangle" in AAOI stock. This is a bearish setup and there's really no telling when the selling will exhaust.
While we can't see when it will happen, we can see when it has happened. When AAOI stock breaks out over the top of its descending triangle, investors who want to play this name can consider buying. These setups are attractive because the risk-reward profile tends to be so reasonable. We would look to play a strong rally in the name while using a stop-loss on AAOI if it re-enters the descending triangle.
One additional note: Remember that AAOI reports earnings on Wednesday after the close .
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