Shares of Applied Optoelectronics (NASDAQ:AAOI) closed 9.3% lower on Wednesday, having slid as far as 9.5% lower earlier in the day. Investors in the maker of optoelectronic components used in high-speed optical networking equipment reacted to a bearish research note from analyst firm B. Riley FBR.
B. Riley analyst Dave Kang argued that Applied Opto is vulnerable to lost orders if the Trump administration's proposed tariffs on Chinese goods are allowed to take effect in September. The company's largest customers are all-American data center operators Amazon.com (NASDAQ:AMZN) and Facebook (NASDAQ:FB), but Applied Opto manufactures most of its products in Chinese factories. Adding a 10% tariff cost to its products could inspire these clients to find other component sources that don't come with this uneconomical baggage. In this brutally competitive market sector, there's almost no wiggle room for even slightly higher prices on comparable products.
Kang also noted that Applied could attempt to shift its manufacturing out of China and into a Taiwan-based facility as appropriate, but the production capacity in Taiwan is largely unknown and manufacturing costs in that location would most likely be higher.
Nobody knows whether Trump's tariffs will ever be enforced, since there are congressional hearings and several months of potential indecision to contend with. But if they do, it looks like Applied Optoelectronics and its shareholders will suffer. I can't blame investors for showing their nerves today.