On Friday, Rosenblatt Securities increased its stock price target for Applied Optoelectronics (NASDAQ:AAOI), a provider of fiber-optic networking products, to $44, up from the previous target of $27.50, while maintaining a Buy rating on the stock.
This revision reflects a positive outlook based on the company's future earnings potential. The stock, currently trading at $33, has shown remarkable momentum with a 227% surge over the past six months, though InvestingPro data indicates high price volatility with a beta of 2.37.
The firm's decision comes after discussions with Applied Optoelectronics' management, which revealed strong demand for 400G products needed for front-end networks and confirmed the company's capacity to meet its fourth-quarter 2024 targets. The company is also investing in 800G capacity, anticipating a new product cycle beginning in the first half of 2025.
According to the analyst, the shift in customer preference towards U.S. producers over Chinese vendors has been gaining momentum, which could benefit Applied Optoelectronics. This shift, coupled with the company's status as one of the most vertically integrated AI Datacom transceiver suppliers, is expected to contribute to robust revenue growth.
The analyst's forecast remains unchanged for now, with revenue and earnings per share (EPS) projections for fiscal years 2025 and 2026 at $474 million/$0.57 and $534 million/$1.10, respectively. However, there is a potential for the company to exceed these forecasts.
The price target of $44 is based on 40 times the firm's conservative 2026 EPS estimate. The analyst highlighted the company's strong gross margins (GMs), which are anticipated to begin improving in the first half of 2025, and contribute to solid revenue growth well above the margin levels seen in recent years.
In other recent news, Applied Optoelectronics experienced a notable rise in its Q3 2024 revenue, reaching $65.2 million, a year-over-year increase of 4% and a substantial surge of 51% from the previous quarter. Despite a 16% decrease in data center revenue, the company reported a 90% sequential growth in the same sector.
The CATV segment's revenue also saw a significant increase due to high demand for 1.8 GHz amplifiers. However, the company's non-GAAP loss per share stood at $0.21, primarily due to increased research and development costs, predominantly in the data center sector.
Applied Optoelectronics has also initiated a patent infringement lawsuit against Eoptolink Technology USA Inc., alleging the violation of multiple optical transceiver patents held by the company. It is seeking both monetary damages and a permanent injunction against Eoptolink to prevent further alleged infringement of its patents.
Adding to these developments, B.Riley changed its rating for Applied Optoelectronics stock from Neutral to Sell, expressing concerns over a potential deceleration in the 400G market segment. The firm's analysis suggests that the recent outperformance of Lumentum and Applied Optoelectronics does not support the theory that U.S. optical companies are benefiting from the U.S. government's tough stance on Chinese firms.
For Q4, analysts from Applied Optoelectronics project revenue to be between $94 million and $104 million, with a non-GAAP gross margin expected to be between 27.5% and 29.5%. Despite the challenges, Applied Optoelectronics secured three out of the top five data center customers and expects margins from the cable TV segment to surpass those from data centers soon.
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