Has Applied Optoelectronics (AAOI) Reached Value Stock Territory?

Shares of Applied Optoelectronics (NASDAQ:AAOI) surged about 2.3% in late afternoon trading Tuesday—a rare sign of life for a stock that has been battered over the past several months. Even with today’s gains, AAOI is down about 75% from its mid-summer highs, including a nearly 20% dip in the month since its latest earnings report.

Nevertheless, Applied Opto’s slump have led some investors to consider buying the trendy stock on the dip. But has AAOI really entered value stock territory, or should investors continue to avoid this volatile pick? Let’s take a closer look.

Latest Earnings

Applied Optoelectronics reported its latest quarterly financial results on Feb. 21. The company posted non-GAAP earnings of $0.89 per share, beating the Zacks Consensus Estimate of $0.82. That type of surprise typically pleases investors, but there were a number of negatives to focus on as well.

Notably, Applied Opto saw quarterly revenues of $79.9 million, which came in well below our consensus estimate of $86.2 million. Management also said that it expects 1Q18 revenues in the range of $67.0 million to $71.0 million and non-GAAP earnings in the range of $0.28 to $0.34 per share. Heading into the report, our consensus estimates were calling for Q1 revenues of $88.4 million and earnings of $0.74 per share.

That lackluster guidance was enough to send investors fleeing in the aftermath of the report, and AAOI has yet to recover from this post-earnings slump.

Current Valuation

Applied Opto’s post-earnings slump has made its shares look awfully cheap compared to its industry peers:

AAOI’s peer group is a Zacks-defined set of companies that includes similar tech suppliers like Ambarella (NASDAQ:AMBA) , Lattice Semiconductor (NASDAQ:LSCC) , Rambus (NASDAQ:RMBS) , and Impinj (NASDAQ:PI) . These companies are not directly comparable with Applied Opto, but they help show how investors are valuing these types of tech firms right now.

AAOI clearly has an attractive valuation compared to these other stocks. The company also has a “B” grade for Value in our Style Scores system, and on top of its attractive Forward P/E, the stock’s P/S of 1.3 and PEG of 0.8 make it look undervalued at its current levels.

However, our Style Scores are best used in tandem with the Zacks Rank. In other words, the strongest value opportunities are those that present both a great Value grade and a strong Zacks Rank. AAOI is currently sporting a Zacks Rank #5 (Strong Sell), so we know that it is not one of these strong value stocks.

But why is Applied Opto sitting at such a low rank right now? Let’s take a closer look at the company’s latest earnings estimates to find out.

Estimate Revision Trends

The Zacks Rank focuses on an analyst estimates and estimate revisions to determine which stocks have an improving outlook and which stocks are trending in the wrong direction. Here’s a look at the revision trend for AAOI:

As we can see, the Zacks Consensus Estimate has come down significantly on the back of universal downward agreement among revising analysts.

While some might think the worst is over for AAOI, analyst estimates actually tend to come down gradually over time. That means that AAOI could continue to see more volatility as its outlook worsens. The stock might have interesting valuation metrics right now, but now all stocks that have been sold off deserve to be bought on the dip.

Want more market analysis from this author? Make sure to follow @Ryan_McQueeney on Twitter!

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