On Thursday, Applied Optoelectronics (NASDAQ:AAOI) received a downgrade from a B.Riley analyst, shifting from a Buy to a Neutral rating. Accompanying this change, the firm also reduced the price target to $16.00 from the previous $22.00. The downgrade follows the company's unexpectedly subdued first-quarter forecast, which contrasts sharply with the stock's substantial rally in the past year, fueled by a supply agreement with Microsoft (NASDAQ:MSFT) for active optical cables (AOC).
Applied Optoelectronics reported fourth-quarter sales and earnings per share (EPS) of $60.5 million and $0.04, respectively, which fell short of the consensus estimates of $65.2 million and $0.00. While the company saw a 79% quarter-over-quarter increase in 400G revenue, a sequential decline is anticipated for the first quarter. This is particularly concerning as the company only commenced shipments in December. However, Applied Optoelectronics anticipates that 400G growth will resume in the second quarter.
Despite the strong start for 400G products, the first-quarter outlook presented by Applied Optoelectronics indicates expected sales and EPS to be between $41 million to $46 million and negative $0.28 to negative $0.33, respectively. These figures are significantly below the consensus projection of $66.2 million and negative $0.01. The company's 800G product pipeline appears more robust, with more customers expected and some revenue forecasted for the second quarter.
The analyst noted that while Applied Optoelectronics still expects the Microsoft agreement to yield $300 million over the coming years, this projection relies on Microsoft's own forecast, which may change. The analyst also pointed out the competitive landscape, where industry leaders like Coherent (NYSE:COHR), Innolight, and Lumentum have already established strong customer relationships, making it uncertain how well Applied Optoelectronics will penetrate the 800G market.
In light of these developments, B.Riley has adjusted its EPS estimates for Applied Optoelectronics for the years 2024 and 2025, from $0.40 and $1.07 to negative $0.47 and $0.67, respectively. The new price target of $16.00 is based on an enterprise value-to-sales multiple of 2.0x, down from 1.8x, on the firm's 2025 revenue estimate minus net debt.
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