2023-08-04 10:32:45 ET
Applied Optoelectronics ( NASDAQ: AAOI ) stock surged ~40% on Friday after B. Riley Securities upgraded the shares to Buy from Neutral based on improving demand and margins, following the company's Q2 results on Thursday.
The firm also raised its price target to $11.50 from $2.50.
B. Riley's analysts said the upgrade was because of the ramp of 400G; supply agreement with Microsoft ( MSFT ) which could be worth $300M over the next three years; CATV bottoming; and significant margin expansion to improve profitability.
The analysts noted that it did not take long for 400G to become a meaningful revenue contributor, as it doubled Q/Q and represented 11% of datacenter revenue in Q2. 100G was also strong, with a 30% Q/Q growth. The company thinks that the 100G strength will last for several quarters, while 400G will continue to grow.
Regarding the supply agreement with Microsoft, AAOI will supply active optical cables (AOCs) to the tech giant over the coming years, which the company's management believes could be worth $300M over the next 3 years.
The analysts added that CATV seems to be bottoming after a brief inventory correction. Importantly, the company plans to sell directly to cable MSOs, most likely beginning in 2024, leading to improved GM.
The CATV industry is in the process of transitioning to Distributed Access Architecture (DAA), and the analysts think Applied Optoelectronics is well-positioned to gain from this transition.
Despite its recent move, the analysts believe the stock still has more upside and so were upgrading AAOI to Buy.
More on Applied Optoelectronics
- Applied Optoelectronics: Buy On Vastly Improved Outlook
- Applied Optoelectronics: Optics Misaligned, Despite Soaring Stock
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Applied Optoelectronics soars ~40% after B. Riley upgrades on improving demand and margins