Why You Should Avoid Applied Opto (AAOI) Stock Right Now

Shares of fiber-optics equipment maker Applied Optoelectronics (NASDAQ:AAOI) have moved more than 20% lower in the wake of its most recent earnings report, leading some investors to consider buying the trendy stock on the dip. However, a variety of potential problems—including a deteriorating business outlook—could continue to cause problems for AAOI in the near future.

Latest Earnings

Applied Optoelectronics reported its latest quarterly financial results on Feb. 21. The company posted non-GAAP earnings of $0.89 per share, beating the Zacks Consensus Estimate of $0.82. That type of surprise typically pleases investors, but there were a number of negatives to focus on as well.

Notably, Applied Opto saw quarterly revenues of $79.9 million, which came in well below our consensus estimate of $86.2 million. Management also said that it expects 1Q18 revenues in the range of $67.0 million to $71.0 million and non-GAAP earnings in the range of $0.28 to $0.34 per share. Heading into the report, our consensus estimates were calling for Q1 revenues of $88.4 million and earnings of $0.74 per share.

That lackluster guidance was enough to send investors fleeing in the aftermath of the report, and AAOI has yet to recover from this post-earnings slump.

Current Valuation

Applied Opto’s recent sell-off might inspire some investors to consider buying the stock on the dip. After all, its shares are looking awfully cheap compared to the rest of the technology sector right now:

AAOI is currently holding a “B” grade for Growth in our Style Scores system. On top of its attractive Forward P/E, the stock’s P/S of 1.4 and PEG of 0.8 also come at discount to the broader market and industry averages.

However, our Style Scores are best used in tandem with the Zacks Rank. In other words, the strongest value opportunities are those that present both a great Value grade and a strong Zacks Rank. AAOI is currently sporting a Zacks Rank #5 (Strong Sell), so we know that it is not one of these strong value stocks.

But why is Applied Opto sitting at such a low rank right now? Let’s take a closer look at the company’s latest earnings estimates to find out.

Estimate Revision Trends

The Zacks Rank focuses on an analyst estimates and estimate revisions to determine which stocks have an improving outlook and which stocks are trending in the wrong direction. Here’s a look at the revision trend for AAOI:

As we can see, the Zacks Consensus Estimate has come down significantly on the back of universal downward agreement among revising analysts.

Some might assume that the worst of the damage from AAOI’s negative outlook is already done, but analyst estimates actually tend to come down gradually over time. As Applied Opto continues to struggle, analysts could become increasingly bearish, adding even more volatility to the stock.

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