After reporting solid Q4 2014 financial results, analysts have significantly reduced price targets on Applied Optoelectronics (AAOI); However, GeoInvesting maintains its belief that the company’s strong growth story may offer at least 50% upside to shares.  AAOI is a designer and manufacturer of optical communications products for cable television (CATV), fiber-to-the-home (FTTH), and Internet data centers.

Summary of Results

  • Q4 2014 revenues of $36.4 million vs $23.7 million in the prior year
  • Q4 non-GAAP EPS $0.27 vs $0.02 in the prior year
  • Full year revenue of $130.4 million vs $78.4 million in the prior year
  • Full year non-GAAP EPS of $0.68 vs $0.01

GeoTeam to Track AAOI Story

While we investigate why analysts have cut their price targets, we intend to actively track the company for the following reasons:

  • We believe shares may offer at least 50% upside from current prices based on EV/EBITDA multiple analysis
  • AAOI has reported uninterrupted revenue growth from  $40.5 million in 2010 to $130 million in 2014.  Furthermore, analysts expect revenues to increase to $197 million in 2016.
  • Analysts expect EPS to grow from $0.68 in 2014 to $1.18 and $1.57 in 2015 and 2016, respectively.
  • Like several other companies we follow in similar market segment, like Ex-GeoBargain GTT Communications, Inc. (GTT), AAOI business model appears to embody a recurring revenue theme.
  • Even though analyst have cut price targets on the stock, they are still much higher than the today’s stock price. (Analyst price targets range between $15 to $20).

Caveats

  • We caution investors that shares have been falling for some time, despite the company’s favorable financial performance.  For example, the stock’s 52 week high is $28.01.
  • We intend to interview management to make sure we are not missing something with this story.

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