First, shares surged amid heavy order volumes from Amazon.com (NASDAQ:AMZN), which needs high-speed networking tools by the boatload to keep data flowing correctly through its huge and numerous data centers. The stock's value quadrupled between January and early August. Life was good.
Then things took a dark turn -- and quickly.
What went wrong
Chinese regulators clamped down on the country's telecoms, mandating slower infrastructure investments until the next generation of wired and wireless networking standards had been worked out. This is clearly a temporary issue, but Applied Optoelectronics is tightly bound to the fortunes of network equipment builders in China.
Moreover, the latest and greatest portfolio of 40-gigabit optoelectronic transceivers swiftly became old hat when several companies -- including Applied Optoelectronics -- introduced some even faster 100-gigabit alternatives. The demand for these improved technologies caught everyone by surprise, making 40G stockpiles difficult to sell. So the company was caught up in these dual downtrends. Share prices plunged 39% lower in August alone, and the stock is trading 64% below last summer's 52-week highs in early 2018.
100G transceivers to the rescue!
Many sector analysts agree that the key to a swift and full recovery lies in ramping up production of 100G modules in a hurry. The autumnal plunge centered squarely on mismatched supply-and-demand equations, led by Amazon nearly halting its 40G orders overnight.
According to analyst firm Cowen & Co., Applied Optoelectronics is poised to bounce back like a champ. The firm's checks are not showing any market-share losses to large data center customers, which includes the all-important Amazon account. This stability holds for both the new 100G modules and for what's left of the shrinking 40G market.
Revenue from 100G items is building up steam, with various products in that category growing sales at 40%-60% levels from one quarter to the next. In November's third-quarter report, 100G products accounted for 56% of all data center orders and continued to grow at strong double-digit percentage rates.
Analyst Alex Henderson from Needham is worried about pricing pressure as Applied Optoelectronics jockeys for market share with several high-quality rivals. But the balance between supply and demand should straighten up quickly when the module manufacturers get their 100G-manufacturing ducks in a row.
What's next for Applied Optoelectroincs?
Any way you slice it, 40G transceivers are essentially an obsolete product generation now and 100G versions are what matters most for the next several quarters. Applied Optoelectronics will sink or swim with its performance in this crucial market.
This situation won't hold forever, of course. Applied Optoelectronics is already working on 200G and 400G transceiver modules, hoping to make a real market out of these ultra-fast technologies within a couple of years. But these upgrades won't move the company's top or bottom lines -- nor its share price -- for years to come. So let's focus on 100G transceivers right now, because that's what Applied Optoelectronics and its major customers are doing.
John Mackey, CEO of Whole Foods Market, an Amazon subsidiary, is a member of The Motley Fool's board of directors. Anders Bylund owns shares of Amazon. The Motley Fool owns shares of and recommends Amazon. The Motley Fool has a disclosure policy.