Needham says Wall Street too timid on optical communications surge

Needham thinks that Wall Street is timid in terms of upside potential of companies like Applied Optoelectronics.

From a Barron’s news story by Tiernan Ray dated May 22, 2017:

Shares of fiber-optic component supplier Applied Optoelectronics (AAOI) are up $5.85, or 9%, at $69.39, after Needham & Company's(New York, NY)Alex Henderson this morning starts coverage of the stock with a Strong Buy rating, and an $85 price target, writing that the company may have "substantial upside" to Street estimates, as the data center field moves from 25-gigabit-per-second parts to 100-gigabit.

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"AAOI looks like the market share leader and lower cost supplier," observes Henderson. "We expect very strong demand growth over the next several years as the Web 2.0 Big Data, Social Media and IaaS companies drive efficiencies through their current and new scaled-out Data Center footprints."

Henderson's own estimates are not wildly different from the Street consensus. His estimates for this year stand at $448.4 million in revenue and $4.60 per share in earnings. That compares to $444.8 million and $4.66 consensus, according to FactSet. For next year, he sees $527.8 million and $5.03 per share, compared to the average estimate for $523 million and $5.04.

But he maintains that both he and his peers are too "timid" with respect to estimating:

"We think the company is likely to materially exceed street estimates over the next 2-3 quarters as the industry rolls through the steep ramp phase of the Data Comm upgrade to 25G/100G as it hits the major inflection point this quarter. We think the timidness of the street (and our) estimates provide significant upside potential to the stock. Ovum forecasts roughly a 250% growth in 100G Data Comm ports in CY17 and 150% in CY18," says Henderson.

The key is that the company is going into a major production push that will substantially boost how much product they're selling:

Henderson continues, "AOI is rolling from 400,000 lasers production per month at the beginning of the year to 1 million per month by year end. We think AOI production was around 500,000 per month at the end of CY1Q and are likely in the 550,000-600,000 per month currently. Please note there are 4 lasers per transceiver. Based on volume alone, the increase in capacity implies a Revenue growth rate substantially in excess modeled estimates."

… The rest of the Barron's story appears at the link below.

Laser Focus World is also bullish on fiber-optic communications revenue; see our forecasts for just the laser components in this summary slide show: Where have all the lasers gone?

SOURCE: Barron's: http://www.barrons.com/articles/applied-opto-surges-street-too-timid-about-them-says-needham-1495470614

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