Shares of Applied Optoelectronics (AAOI 14.51%) have soared 460% higher in the last 52 weeks. That's more than a fivefold gain, driven by a four-quarter streak of strong revenue and earnings surprises.
Will the fiber-optic component-maker's fortunes keep skyrocketing, or is it time for investors to take these huge wins off the table and invest elsewhere? Let's find out.
Fundamental business strength
The stock is not soaring on dreams and rainbows alone. Trailing sales stood at $307 million in the recently reported first quarter, 46% above the same metric's reading a year earlier. Meanwhile, GAAP earnings rose from $11 million to $52 million. Free cash flows stopped at $17 million, but the year-ago result was a $60 million trailing cash burn:
Management is putting the company's newfound cash-crunching powers to good use, too. Applied Optoelectronics has paid down its long-term debt balance from $67 million to $24 million in the last two quarters. The return on equity ratio surged from 8% in 2015 to 24% on a trailing basis today, while the company's return on invested capital rose from 12% to 19%.
There's substance behind Applied Optoelectronics' soaring share prices. The company is literally earning its keep.
A sudden 400% share-price surge often pushes that stock into nosebleed-inducing territory. But because the price surge was matched by fantastic boosts to the company's bottom-line profits, Applied Optoelectronics doesn't look particularly expensive right now.
You can pick up shares at just 11.5 times forward earnings, or 21 times trailing profits. The price-to-free-cash-flow ratio does look kind of crazy, but that should change quickly if Applied Optoelectronics' rosy cash-flow trend continues.
How long can this story last?
Analyst firm BWS Financial is unimpressed by Applied Optoelectronics' fundamental business and expects the good times to stop rolling in short order. The firm believes that data centers with 40-gigabit fiber-optic interconnects should move on to newer 100G components soon enough, which "could lead to a series of disappointments for AAOI shareholders."
On the other hand, the company is part of the 100G upgrade cycle, too. Sixty-two percent of its data-center sales came from 40G products in the first quarter, but 30% of that division's revenues already rest on 100G parts.
On that note, analyst firms Needham and Cowen agree that the market is underestimating the manufacturing prowess of Applied Optoelectronics today. Management set some optimistic volume goals earlier this year -- and is delivering on those promises today.
The company collected 55% of its sales last year from Amazon.com (AMZN 1.26%) as the e-commerce giant needs a lot of fiber-optic equipment to keep its Amazon Web Services and other data centers running at top speed. That commitment changes the discussion about Applied Optoelectronics into a pretty pure manufacturing analysis. The orders are coming, and it's up to the company to deliver.
Therefore, I assign more value to the optimistic manufacturing analysis than to the pessimistic missing-the-boat speculation. Applied Optoelectronics seems poised to keep the financial improvements coming, and stock prices should continue to follow suit.
Long story short: No, I don't think it's time to move on from owning Applied Optoelectronics today. Not at all.