Is Applied Optoelectronics Stock A Buy?

Applied Optoelectronics (NASDAQ:AAOI) is an important part of the Internet, but it’s not as recognizable of a brand as Facebook and Google.

The company is vertically integrated to provide a full range of products for cable television broadband, fiber-to-home, and internet data centers. Its range of products is the backbone of the lightning-fast Gigabit internet you hear so much about.

Still, it experienced its biggest market share in 2017 and spent 2020 worth only a fraction of its $96.64 high in August of that year. This begs the question, is Applied Optoelectronics a Buy?

Fiber-optic networks are even more crucial today as the 5G buildout continues and more people work remotely than ever before. However, Applied Optoelectronics is carrying a load of debt that could hinder its ability to keep up with the fast pace needed in this environment.

Still, its vertical integration gives it all the assets it needs to continue generating revenue. Let’s look at whether AAOI stock is a value buy or company in need of an exit strategy.

Applied Optoelectronics: The Internet Backbone

Applied Optoelectronics does very much what its name implies, which is develop, manufacture, and distribute components and equipment for advanced optical data usage.

In August 2020, the company announced it bounced back from the COVID-19 crisis by manufacturing a record 1.1 million units of its laser diodes the previous month.

This increased production is a good sign in the post-pandemic era, where holiday supply chain troubles are plaguing everyone.

The company supports cable TV, broadband internet, and telecom industries, which means it has a stake in pretty much every method currently used to deliver internet to homes and businesses across the globe.

And while the company’s five-year stock chart shows demand for the company peaked several years ago, demand for the products it provides is continuing to grow, as companies like AT&T, Verizon, and Comcast seek to increase their abilities to provide high-speed connectivity to the masses.

Over the next decade, you’re going to see the effects of the FCC wireless broadband auctions start to really show.

The same wireless spectrum is used for government, hospitals, airlines, TV and radio stations, satellite communications, smartphones, wireless GPS, home Wi-Fi, Bluetooth, NFC, and more.

As society evolved over the past 20 years, our usage of TV and radio was surpassed by the need for wireless data.

Over-the-air broadcasts are being replaced by high-speed data lines, and Applied Optoelectronics is working at the heart of where all these signals are transmitted from the broadcast towers to the servers and nodes passing the data.

So, should you invest?

Is Applied Optoelectronics Stock A Buy?

The reason Applied Optoelectronics is priced so low is because of its debt. Even though it’s setting manufacturing records, the company has around $50 million in cash with $145 million in debt as of mid-year.

Its total debt is just over half of its total equity though, as its market cap hovers in the $200-250 million range. The company is burning through cash to keep its operations running and people employed, and this tags the stock with a high level of risk.

The stock is a volatile investment and has never paid a dividend since going public in September 2013. It also hasn’t broken free of its IPO price of $10 per share, which is where it hovered and even dipped below when the 2020 market crash hit in March.

Although it recovered, this pattern shows that it’s more apt for day trading than long-term holding for the purposes of financial security in retirement.

Day traders can carefully track AAOI, but a retail investor looking for something to invest a 401k in will find better success pretty much anywhere else, even a savings account.

Applied Optoelectronics is not a buy unless you know what you’re doing and are prepared to make fast trades with potential losses. But that doesn’t mean it’s a bad company.

Can Applied Optoelectronics Competitors Win?

Applied Optoelectronics isn’t alone in its market. In fact, optical lasers are being manufactured by a slew of companies, including Mitsubishi, Molex, Finisar, Innolight Technology, Foxconn Interconnect, and Source Photonics.

Many of them have larger market capitalizations and/or cash reserves, and debt ratios, but its vertical integration makes it a worthy competitor. Should the competition pivot into other products, the company can cut its development lead time by handling everything internally.

This vertical integration is the key to Applied Electronics servicing existing relationships and expanding to service customers in other markets. It can fully control the timeline and quality of its manufacturing and distribution from end-to-end, and that is something to consider when determining if the stock will ever crash.

So long as it can keep the lights on, this company has the business connections and resources to ensure it always maintains a steady place in the internet’s infrastructure. It simply needs to invest enough in research and development to ensure it stays ahead of both technology and market trends. This will be the key to the company’s future successes.

Is Applied Optoelectronics Stock a Buy? The Bottom Line

Applied Optoelectronics is a Texas-based manufacturer of high-speed optical lasers that are used as integral part of our data infrastructure. Even wireless communications like smartphones, TV/Radio broadcasts, and Wi-Fi require stable wired connections to properly transmit data between networks, data centers, and more.

The entire internet is a string of nodes and servers, and fiber optics are running it all underground and even under the ocean.

Still, the company’s volatile pricing hasn’t progressed much past its $10 IPO price over the past decade. If the company can’t find a way to expand and generate more revenue channels, it could be a long time before it ever sees a profit. While day traders may enjoy the pricing volatility, long-term investors should shy away from this risky business.

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The author has no position in any of the stocks mentioned. Financhill has a disclosure policy. This post may contain affiliate links or links from our sponsors.