Why Should Investors Care About Applied Optoelectronics (AAOI)?

Since Applied Optoelectronics (NASDAQ:AAOI) reported better-than-expected first-quarter earnings earlier this month, its stock has gained over 50% in value. Applied’s results were undoubtedly impressive, with non-GAAP earnings of $1.10 per share and revenues of $96.2 million. Earnings increased from a loss of 4 cents per share during the first quarter of 2016, while revenues jumped 91% year-over-year. As a result of renewed investor interest, shares of the company hit an all-time high last Friday, reaching $72.95 in intraday trading.

Founded in 1997, Applied Optoelectronics is a leading designer and manufacturer of fiber optic networking products. The company serves three primary markets: cable television broadband, fiber-to-the-home, and internet data centers, and its product portfolio includes laser chips, components, sub-assemblies and modules, and complete turn-key equipment. Applied is headquartered in Sugar Land, Texas, and has subsidiaries in Taipei, Taiwan and Ningbo, China.

Applied operates within optical networking, a sector that has been plagued by a slowdown in Chinese demand due to concerns that orders from Chinese equipment makers Huawei and ZTE were dwindling. Peers like NeoPhotonics (NYSE:NPTN) , Oclaro (NASDAQ:OCLR) , Acacia Communications (NASDAQ:ACIA) , and Finisar (NASDAQ:FNSR) have all been hit hard, and yes, even shares of Applied stumbled on the back of its broader sector’s close relationship with China.

But since the company has little exposure to Chinese demand, Applied was able to maintain its post-earnings rally. Its customer list certainly didn’t hurt either. The company can count tech giants like Microsoft (NASDAQ:MSFT) , Facebook (NASDAQ:FB) , and most importantly, Amazon (NASDAQ:AMZN) , as customers, businesses that helped Applied report those impressive earnings figures.

Amazon, Facebook, and Microsoft are currently in the process of upgrading their respective data centers in order to support their cloud-based divisions like Amazon Web Services (AWS) and Microsoft’s Azure. These tech giants are new customers of optical-parts makers like Applied, notes Investor’s Business Daily, and they are improving their computer server packed data centers with 100-Gbps technology.

Why Should Investors Care About AAOI?

Since the start of 2017, shares of Applied Optoelectronics have gained an astounding 205%, and have soared more than 600% in the past one year. AAOI stock, currently a #1 (Strong Buy) on the Zacks Rank, doesn’t seem to be slowing down any time soon either (also read: Should You Buy AAOI Stock?).

For its fiscal 2017 second quarter, Applied expects revenues in the range of $106 million to $112 million. Non-GAAP earnings are projected to fall between $1.09 and $1.19 per share, above consensus estimates of 96 cents. Zacks currently estimates year-over-year revenue and earnings growth of 98.25% and 970% for the second quarter. Looking at the current year, Applied expects revenue growth of almost 70% and earnings growth of over 269%, with four positive estimate revisions compared to none lower in the past 30 days. The company has an average earnings surprise of more than 118%, and has beaten estimates in the past four consecutive quarters.

Applied Optoelectronics is one of the few optical networking stocks to escape the negative effects that a slowdown in China has triggered. As more and more cloud computing, social media, Big Data, and Web 2.0 companies seek greater efficiency, they’ll need to rely on businesses like Applied to make sure their data centers are fast enough to keep up with market demand.

Data center revenues grew 104% to $79.6 million last quarter, and represented 82.7% of Applied’s total revenue. The company likely has the ability to both maintain and improve this explosive growth simply because data centers are becoming bigger and the need for them is growing every day. Count in its insane growth metrics, impressive customer base, and connections to some of the biggest emerging industries, and you have a company that investors should definitely be paying attention to.

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