Applied Optoelectronics (AAOI 6.89%) stock jumped double digits in early trading on the Nasdaq Stock Market Tuesday, before retracing to about a 7.4% gain through 12:12 p.m. ET.
If you own shares of the fiber optics networking equipment maker, you can thank Rosenblatt Securities for the gains. This morning, Rosenblatt upgraded Applied Opto stock to “buy.”
What Rosenblatt said about Applied Optoelectronics
With a history of losing money in its telecom equipment business, a negative trailing P/E ratio, and a forward P/E ratio (based on predictions of profits over the coming year) at a nosebleed level of 84 times earnings, Applied Optoelectronics may not be most investors’ first choice in seeking a value stock. But just wait, says Rosenblatt. This time is different!
According to Rosenblatt, Applied Optoelectronics’ telecom equipment sales “are poised to explode to the upside” starting later this year, “driven by AI 400+G Optical interconnects for Data Centers and DOCSIS 4.0 amplifiers for Cable networks.” (Yes, you read that right. Rosenblatt is making the argument that Applied Opto is a play on artificial intelligence.)
By 2025, the analyst forecasts the global market for this kind of equipment will grow to $7.5 billion, or even $12 billion. And with Applied Opto likely to capture a 10% market share, consensus forecasts of $465 million in 2025 revenue for the company “may be conservative,” StreetInsider.com quotes the analyst predicting.
Should you buy Applied Optoelectronics stock?
The math here isn’t hard. Rosenblatt is making the case that Applied Optoelectronics might blow past consensus forecasts to generate sales of anywhere from $750 million to $1.2 billion next year — quite an increase from the $222 million or so it is believed to have collected last year. It’s also predicting the company will earn at least $1.15 per share next year, which, if correct, would value the company at less than 15x forward earnings — cheap for a company that might (or might not) nearly quintuple its revenues over the course of just the next two years.
And yet consider: Applied Optoelectronics hasn’t ever come anywhere near doing this level of sales in its history. The company hasn’t even been profitable since 2017, nor generated any positive free cash flow over this time span, either.
Could all of this change in 2025? I suppose anything’s possible. But when you consider that Applied Optoelectronics stock is already up 568% over the past year, despite continuing to lose money and burn cash along the way, it’s also possible that any gains this stock was going to get from rumors that this time will be different, have already been made.
Personally, I’d stay away.
Rich Smith has no position in any of the stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.
