What happened

Shares of Applied Optoelectronics (NASDAQ:AAOI) took a hard fall in early August due to a solid earnings report with a disappointing slate of forward guidance targets. AOI shares closed 31% lower the next day and ended the month at a 39% discount to the last trades of July, according to data from S&P Global Market Intelligence.

Fiber-optic networking cables plugged into an Ethernet transceiver.

Image source: Getty Images.

So what

The maker of components and modules that translate high-speed networking signals between fiber-optic signals and traditional Ethernet formats actually crushed analyst targets in the second quarter. Sales more than doubled year over year to $117.4 million while adjusted earnings rose nearly tenfold to $1.54 per share. Analysts would have settled for earnings of $1.32 per share on sales near $116 million.

But AOI's revenue guidance of $111 million for the third quarter fell far short of Wall Street's expectations, which were calling for $123 million at the time. That metric overwhelmed AOI's positive trends, sending share prices through the trading floor.

Now what

The soft sales guidance is based on low shipping volumes of the aging 40-gigabit transceiver product line, which is being phased out in favor of faster 100G and even 200G variants. The product mix is simply shifting a bit faster than anyone had expected, and AOI wasn't prepared to replace the old 40G products with updated transceivers just yet. It takes time to retool the manufacturing lines, after all.

Customer demand for AOI's fiber optic tools remains high and rising, and management likes to point out that its shipping volumes are limited by the company's manufacturing capacity more than anything else. The stock is going through some uncomfortable volatility while these kinks are being worked out. Share prices soared 58% higher in July only to lose those gains in August, and the roller-coaster ride is likely to continue. Feel free to take a closer look at AOI's long-term prospects anytime the stock goes on fire sale, such as right now.

Anders Bylund has no position in any of the stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.