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Applied Optoelectronics AAOI shares have plunged 51% over the past three months, underperforming the Zacks Computer and Technology sector, the Zacks Electronics - Semiconductors industry and the S&P 500 index’s decline of 10.2%, 21.2% and 4.1%, respectively.
AAOI Three-Month Price Performance Chart
Image Source: Zacks Investment Research
The recent decline in AAOI’s stock price was due to growing concern over the company’s declining bottom line. On Feb. 26, it reported non-GAAP net loss of $1 million for the fourth quarter of 2024 and guided that it might incur a loss of $3.6 million in the first quarter of 2025.
Following the dismal outlook, the stock has witnessed sharp downward estimate revisions, reflecting near-term pessimism for the stock among analysts. The Zacks Consensus Estimate for AAOI’s 2025 EPS has been downgraded by 30 cents to 64 cents in the past 30 days.
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The escalating trade war between the United States and China has also turned investors increasingly cautious about Applied Optoelectronics’ near-term prospects. AAOI’s business is heavily dependent on China. In 2024, 2023 and 2022, AAOI's revenues from products manufactured at its China plant accounted for 44.8%, 19.9% and 23%, respectively. The U.S. government’s latest tariff policy with a 10% additional tariff on imports from China could hurt its sales.
AAOI Faces Competitive Pressure From Industry Leaders
The global fiber-optic networking market includes old and established players like Corning GLW, Cisco CSCO and Lumentum Holdings Inc. LITE, which are bringing constant innovation.
Corning is a leading player in the fiber optics space with products like SMF-28 Ultra, Corning Infinicor 300 and its ClearCurve lineup. Both Cisco and Lumentum offer photonics-based products for 400G and 800G systems.
Cisco’s photonics portfolio comprises QSFP-DD 400G ZR-plus, QSFP-DD 400G ZR and QSFP-DD 400G ER1. Lumentum offers Indium Phosphide (InP)-based 130+ GBaud Smart TROSA, 200G per Lane InP Lens Integrated Photodiode and Ultra-High Power 400mW 1310nm DFB Laser.
To keep up with the changing market conditions and competitive pressure, Applied Optoelectronics is heavily spending on its research and development (R&D), which is driving operational costs higher. Rising expenses have been weighing on Applied Optoelectronics’ gross margin. The company’s gross margin contracted 470 basis points in the fourth quarter of 2024.
However, not everything is gloom and doom for Applied Optoelectronics.