Owning shares of Applied Optoelectronics (AAOI 21.05%) isn't for the faint of heart. The maker of fiber-optic lasers and networking components has rewarded shareholders with a 410% gain over the last 52 weeks, but that span also included three sudden drops of at least 20%.
If you can live with that kind of hypervolatility without selling your shares in a panic, this might be the perfect time to invest in Applied Optoelectronics. Here are three great reasons why.
1. Massive growth
Applied Optoelectronics' sales aren't just showing healthy growth right now -- the top line's gains are accelerating. The same holds true for EBITDA profits, adjusted earnings, and pretty much any financial metric you'd care to measure:
The bulk of Applied Optoelectronics' business comes from Amazon.com (AMZN 1.29%) and Microsoft (MSFT -0.51%) these days. The two tech titans are powering up their cloud computing services with huge investments in data center upgrades, including large amounts of high-speed fiber-optic networking tools. Both Microsoft and Amazon increased their Applied Optoelectronics orders tenfold between 2013 and 2016, and neither company is showing any signs of an order slowdown.
Meanwhile, former largest customer Cisco Systems is fading into the background of Applied Optoelectronics' operations and now accounts for just 5% of the fiber-optics specialist's 2016 sales. No harm done, because the cloud computing titans more than make up for those lost Cisco sales.
2. Low share prices
I know I just told you that Applied Optoelectronics' shares have soared 400% higher in a single year, but there's still plenty of room for further gains.
The stock is trading at just 12 times forward earnings and 21 times trailing EBITDA profits. These numbers are outrageously low in the context of Applied Optoelectronics' rampant sales and earnings growth.
This would make sense if gravy train were careening off the rails in short order. That's not the case at all. None of the company's large cloud customers are likely to take their feet of their respective accelerators for years to come, which means that Applied Optoelectronics' optical transceivers will remain in high demand.
In fact, the company's sales are limited by its manufacturing volumes more than by customer demand.
"We're going to be selling everything we can produce in this quarter," said CFO Stefan Murry in last week's earnings call.
"We are on track with our goal to expand capacity to approximately 1 million fully qualified lasers per month," explained CEO Thompson Lin. "In the month of June, we produced over 680,000 lasers which represents 67% growth year to date."
So greater production volumes are coming down the pipeline, and Applied Optoelectronics has more than enough transceiver orders in the books to move those laser-based products out the door in short order. In other words, there's no reason to apply a discount to Applied Optoelectronics' share price based on slowing sales.
3. Perfect timing
In last Thursday's earnings report, Applied Optoelectronics cited slow sales of 40-gigabit data center transceivers as the driving force behind modest revenue guidance for the next quarter. The stock plunged 26% lower the next day, creating the separation between high business performance and low share price discussed above.
The fact that customers are moving on from the aging 40G product line to newer and faster 100G transceivers should come as no surprise. It's a natural progression from one product generation to another, and Applied Optoelectronics must move its production lines over from 40G to 100G transceivers in lockstep with its clients. One customer is moving a bit faster than expected, causing a temporary revenue hit.
In the long run, that's no more than a speed bump along Applied Optoelectronics' long and steep runway for revenue growth. The stock is on sale for myopic short-term reasons, and this is exactly the type of temporary market weakness that drives opportunistic investors wild.
This is the right time to buy, not to put Applied Optoelectronics on the back burner for further research. Sure, you can always do that, but it will probably be a while before you see a discount as juicy as this one again.