What happened

Shares of Applied Optoelectronics (NASDAQ:AAOI) fell 40.4% in September, according to data from S&P Global Market Intelligence. The fiber-optic networking specialist suffered three separate single-day drops of at least 10%, setting fresh 52-week lows in the process.

So what

In early September, an analyst downgraded two of Applied Optoelectronics' chief rivals. The downgrade cited issues such as slow orders for certain types of optical networking products and the then-upcoming impact of new trade tariffs on goods made in China. A lot of Applied's manufacturing happens inside that country, and the same analyst had already noted that the company looks vulnerable to those trade-war tariffs, so the stock fell more than 11% that day.

Three weeks later, another analyst posted a downgrade specifically for Applied Optoelectronics. Loop Capital Markets' James Kisner said that quality control problems with certain lasers made by the company could hurt profit margins and market share in upcoming quarters. The stock took another 10% fall in a single trading session.

And the very next day, Applied Optoelectronics' management slashed its third-quarter revenue targets due to exactly the type of quality control issues that Loop Capital had identified. That triggered a 15% plunge.

Fiber-optic transceiver with two connected Ethernet cables and two disconnected fiber-optic Lucent connectors.

This is what a fiber-optic transceiver looks like. Image source: Getty Images.

Now what

The troubling quality control difficulties reportedly affect less than 1% of Applied Optoelectronics' lasers and a similarly small portion of the transceivers using the component. Shipments are back on track after a temporary pause, but the damage has already been done to this company's credibility. With or without tariff-boosted prices, major clients might go for other transceiver brands in order to avoid the risk of another manufacturing gaffe.

Investors will have to wait until early November's full third-quarter report to get a better sense of how this incident affected Applied Optoelectronics' long-term order flow. Until then, the plunging stock prices make a lot of sense.

This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium advisory service. We’re motley! Questioning an investing thesis -- even one of our own -- helps us all think critically about investing and make decisions that help us become smarter, happier, and richer.