What happened

Shares of Applied Optoelectronics (NASDAQ:AAOI) have soared today, up by 18% as of 12:40 p.m. EDT, after getting an upgrade from Wall Street. Needham boosted its rating on the fiber-optic networking technology specialist from hold to buy while assigning a $15 price target.

So what

Analyst Alex Henderson acknowledges that Applied Optoelectronics has had its fair share of challenges recently but is optimistic around "several secular drivers on the horizon" for its data center, CATV broadband, and telecommunications businesses. Those trends should allow the company to return to growth and profitability, according to Henderson.

Green stock chart going up

Image source: Getty Images.

"Improving mix, sharply ramping chip volumes, a rebound in Cable products, the ramp in 100G and new higher speed products should drive margin expansion," the analyst wrote in a research note to investors. "These conditions should enable AOI to get back to profitability, potentially by the end of the year."

Now what

Applied Optoelectronics intends to improve its cash flow while reducing capital expenditures this year, Henderson notes, which could allow the company to become profitable within the next six to 12 months. The $15 price target represents 25% upside from yesterday's close.

The COVID-19 pandemic has impacted the company's operations in China by delaying construction of a manufacturing plant. On the last earnings call, CFO Stefan Murry said, "In light of the uncertainties surrounding the pandemic, we are still evaluating our level of capex for the year."

The company is set to report second-quarter results on Thursday, Aug. 6.