On Tuesday, B.Riley changed its rating for Applied Optoelectronics (NASDAQ:AAOI) stock from Neutral to Sell, setting a new price target of $14. The firm expressed concerns over a potential deceleration in the 400G market segment.
According to InvestingPro data, AAOI's stock has shown significant volatility, with a remarkable 255% surge over the past six months, though current analysis suggests the stock is overvalued at its present trading level.
This downgrade comes despite the company's shares, along with those of Lumentum (NASDAQ:LITE), performing notably well in the second half of the year, outpacing competitors such as Coherent (NASDAQ:NYSE:COHR) and Fabrinet (NYSE:NYSE:FN).
InvestingPro analysis reveals that three analysts have recently revised their earnings downward, with the company expected to remain unprofitable this year.
B.Riley's analysis suggests that the recent outperformance of Lumentum and Applied Optoelectronics does not support the theory that U.S. optical companies are benefiting from the U.S. government's tough stance on Chinese firms. The firm noted that Coherent and Fabrinet, both U.S.-based, have not seen similar stock gains, which challenges the idea of a broad sector advantage due to political factors.
The firm's position is further supported by industry dynamics, particularly the unbundling of NVIDIA's (NASDAQ:NVDA) platforms, which has also led to B.Riley's recent downgrade of Fabrinet to Sell. Lumentum's announcement of a second 800G hyperscaler win, with Alphabet (NASDAQ:GOOGL) already a significant customer, indicates a trend where major hyperscalers may be moving towards unbundling solutions.
Applied Optoelectronics' downgrade reflects B.Riley's cautious stance on the company's near-term prospects within the optical networking sector. The firm's analysis points to a shift in the industry's competitive landscape, with some companies potentially facing headwinds as market dynamics evolve. InvestingPro subscribers can access 15+ additional investment tips and a comprehensive Pro Research Report for AAOI, offering deeper insights into the company's financial health and market position.
In other recent news, Applied Optoelectronics has reported a rise in its Q3 2024 revenue, reaching $65.2 million, a 4% increase year-over-year and a substantial 51% surge from the previous quarter. Despite a 16% decrease in data center revenue, the company reported a 90% sequential growth in the same sector.
The CATV segment's revenue also experienced a significant increase due to high demand for 1.8 GHz amplifiers. The company's non-GAAP loss per share stood at $0.21, attributed to increased research and development costs, primarily in the data center sector.
In addition, Applied Optoelectronics has initiated a patent infringement lawsuit against Eoptolink Technology USA Inc. The lawsuit alleges that Eoptolink has violated multiple optical transceiver patents held by Applied Optoelectronics. The company is seeking both monetary damages and a permanent injunction against Eoptolink to prevent further alleged infringement of its patents.
Analysts from Applied Optoelectronics project Q4 revenue to be between $94 million and $104 million, with a non-GAAP gross margin expected to be between 27.5% and 29.5%. Despite the challenges, Applied Optoelectronics secured three out of the top five data center customers and expects margins from the cable TV segment to surpass those from data centers soon. These are among the recent developments that investors should be aware of.
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