B.Riley Upgrades Applied Optoelectronics (AAOI) to Buy, 'Based on Improving Demand and Margins'

B.Riley analyst Dave Kang upgraded Applied Optoelectronics (NASDAQ: AAOI) from Neutral to Buy with a price target of $11.50 (from $2.50).

The analyst comments "We are upgrading Applied Optoelectronics (AAOI—Buy, $11.50 PT) from Neutral to Buy based on the following reasons: (1) the ramp of 400G, (2) the supply agreement with Microsoft (MSFT) that could be worth $300M over the next 3 years, (3) CATV bottoming, and (4) significant margin expansion to improve profitability. Thursday (8/3) AMC, AAOI reported 2Q sales/EPS of $41.6M/$(0.21), compared with consensus of $45.4M/$(0.28). It didn’t take long for 400G to become a meaningful revenue contributor, as it doubled Q/Q and represented 11% of datacenter revenue in 2Q. 100G was also strong, with a 30% Q/Q growth. Management believes the 100G strength will last for several quarters while 400G will continue to grow. Regarding the supply agreement with MSFT, AAOI will supply AOCs (active optical cables) to MSFT over the next several years, which management believes could be worth $300M over the next 3 years. Meanwhile, CATV seems to be bottoming after a brief inventory correction. More importantly, the company plans to sell directly to cable MSOs, most likely starting in 2024, resulting in improved GM. The CATV industry is in the process of transitioning to DAA (Distributed Access Architecture), and we believe AAOI is well-positioned to benefit from this transition. The 3Q outlook included sales/EPS of $60M-$66M/$(0.06)-$0.01, above consensus of $48.4M/$(0.24). We raise our 2023 revenue/EPS estimates from $196.6M/$(0.97) to $223.9M/$(0.52). We also introduce our 2024 revenue/EPS estimates of $329.5M/$0.37. We raise our PT from $2.50 to $11.50, which is based on an EV/sales multiple of 1.3x (0.9x previously) our 2024 (2023 previously) revenue estimate minus net debt. In short, we believe the company’s fundamentals are about to improve significantly due to the ramp of 400G, CATV in a recovery mode, and the major AOC supply deal with MSFT. Despite its recent move, we believe the stock still has more upside, and as such, we are upgrading to Buy."

For an analyst ratings summary and ratings history on Applied Optoelectronics click here. For more ratings news on Applied Optoelectronics click here.

Shares of Applied Optoelectronics closed at $6.59 yesterday.

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