What is the "cloud" anyway? Its fiber optics an servers. They just ain't on our homes any more.
So how about investing in a boring "picks and shovels" play? $AAOI is one!
Key Stats
| Ticker | AAOI |
|---|---|
| Sector | Communications & Networking |
| Latest price | $62.85 |
| Value | $1,213M |
| Daily vol | $191M |
| Date | 27 September 2017 |
| Links | Financials, ao-inc.com |
1. Love lasers?
Applied Optoelectronics is a vertically integrated provider of fiber-optic networking products, primarily for networking end markets, such as Internet data center, cable television (CATV), fiber-to-the-home (FTTH) and telecommunications (telecom).
i.e. they design & manufacture fiber optics ... think of all the tedious cables behind your TV, computer, etc... now think industrial scale.
Here's their presentation from a recent investor field trip, in case you want the nitty-gritty.
What's not to love about boring tech like this. Surely there is significant demand? And it shows in the recent numbers and in the forecasts!
| Metric | 2012A | 2013A | 2014A | 2015A | 2016A | 2017E | 2018E |
|---|---|---|---|---|---|---|---|
| Revenue | $63m | $78m | $130m | $190m | $271m | $445m | $531m |
| EPS | $-3.56 | $-0.14 | $0.28 | $0.65 | $1.76 | $5.38 | $5.75 |
In fact, it's really really impressive how the ramp in sales is filtering down to the bottom line, so far this year. That's operational leverage for you.
Looking at the balance sheet, they have a small net cash position. They don't pay a divie, there are no buybacks, and currently capex is way above depreciation. So the balance sheet is growing as they invest. No wonder they've done a share issue in each of the last 4 years... diluting existing shareholders :( Annoying, but it's been needed to fuel growth.
Best in class
Impressive as the business metrics are, there is competition. Some of it substantial. They highlight:
EMCORE Corporation, Finisar Corporation, Foxconn Interconnect Technology Ltd., Lumentum Holding, Inc., Mitsubishi, Molex, LLC, Oclaro, Inc., Source Photonics, and Sumitomo Electric Industries, Ltd.
| Companies | Latest Sales | Operating Profit | Return on Equity |
|---|---|---|---|
| Applied Optoelectronics Inc | $369M | 27% | 34% |
| EMCORE Corporation | $119M | 9% | 6% |
| Finisar Corporation | $1,450M | 19% | 17% |
| Lumentum Holdings Inc | $1,002M | 12% | -19% |
| Oclaro Inc | $601M | 23% | 38% |
| Cisco Systems, Inc. | $48,005M | 31% | 15% |
Looking at the data, from an operational and returns perspective they are best in class.
aside: Cisco isn't a competitor, but a customer, but have added it to show what a mega-cap looks like in the Networking and Communications sector.
2. How's the valuation compare?
Despite the significant growth prospects for all the stocks in the sector, the valuations are far from challenging. But this is small cap land.
| Peers | Valuation | Forecast PE | Long-term Growth | Dividend Yield | FCF Yield |
|---|---|---|---|---|---|
| AAOI.O | $1,213M | 12x | 15% | 0% | 8% |
| EMKR.O | $226M | 16x | N/A | 0% | 5% |
| FNSR.O | $2,378M | 14x | 14% | 0% | 14% |
| LITE.O | $3,147M | 17x | 19% | 0% | -1% |
| OCLR.O | $1,408M | 11x | 13% | 0% | 11% |
| CSCO.O | $167,178M | 14x | 10% | 4% | 10% |
And perhaps it's one of those pro-cyclical sectors that worry people. i.e. if the economy turns everyone gets trashed.
3. But Wall Street is a fan!
The professionals on Wall Street have a $85.67 that implies an upside of 36% to their target. So no wonder they say Buy.
It's a specialist group of brokers that look at AAOI: Cowen, Pipper Jaffray, Raymond James. Which of course means, it's not yet been "discovered" by the mainstream.
Looking at the earnings releases, AAOI's beaten estimates the last 4 quarters. Handsomely. Though before that, there ability to manage Wall Street was a mixed bag.
4. Down 40%?
Today the stock's in the low 60s having been in the 100s in July. On the 2Q earnings call they indicted softness for the 3rd quarter.
On a sequential basis our guidance represents a decline of approximately 5% at the midpoint, reflecting a decrease in 40G demand offset by continued growth in 100G which we expect to increase even as planned pricing reductions take effect in Q3. We currently expect to deliver sequential revenue growth in the fourth quarter, as we continued to ramp 100G capacity.
Growth stocks don't see sales declines, eh? No wonder the market got spooked! Some shareholders even filed a class action!
So the stock's got from trading on 20 times to 12x. i.e. it's no longer priced to perfection.
But perhaps the scariest thing is this:
In 2016, 2015, and 2014, Amazon accounted for 54.6%, 52.5%, and 45.8% of our revenue, respectively, and Microsoft accounted for 18.3%, 11.6%, and 3.6% of our revenue, respectively.
Though you could say this is a plus ;) Everyone in tech loves Amazon AWS, but you have to buy that tediously low margin online retailer amazon.com when you invest in AMZN :) Is this is a cheap way to ride the AWS bandwagon. Wishful thinking, I know.
5. Love boring?
So I'm tempted, even with the AWS double edge sword. If they could just diversify their client base!
They've got scale, and are generating strong cash-flows. They seem to be supply constrained not suffering a lack of demand. Hopefully, their need to raise money from shareholders is over, and the business can self-fund... heaven forbid, even start paying dividends or do buybacks.
In the meantime, if feels like it merits a small / speculative position... it's a small cap after all!
Anyone?
View the archive of Stock a Day posts at r/stockaday.
Disclosure:
I have no position in the stocks mentioned. However I may initiate a position within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it. I have no business relationship with any company whose stock is mentioned in this article.
Reddit, moderators, and the author do not advise making investment decisions based on discussion in these posts. Analysis is not subject to validation and users take action at their own risk.
Author: /u/shane_stockflare / Shane Leonard, CFA
Submitted September 27, 2017 at 12:44PM by shane_stockflare http://ift.tt/2wWyfg9
