Shares of Applied Optoelectronics (AAOI) are sliding after Loop Capital analyst James Kisner downgraded the stock to Sell, saying his industry checks suggest the company is having product quality issues in 100G CWDM4 transceivers and that the pricing environment for 100G data center optics “remains very tough”.
SELL APPLIED OPTOELECTRONICS: In a research note to investors this morning, Loop Capital’s Kisner downgraded Applied Optoelectronics to Sell from Hold and lowered his price target on the shares to $20 from $45. The analyst pointed out that his conversations with industry contacts suggest that Applied Optoelectronics is having product quality issues in its 100G CWD4 transceivers. Specifically, his checks suggest that the company’s lasers are failing after thousands of hours of operation. While Kisner acknowledged that it is possible that Applied Optoelectronics can get around the problem by procuring lasers externally, he argued that this would “obviously be negative for gross margin”.
Another possibility is that the company could just lose market share in 100G CWDM4, he contended. Meanwhile, Kisner is hearing from industry contacts that the pricing environment for 100G CWDM4 data center optics is “very tough right now.” His industry checks suggest that 100G CWDM4 ASPs are now running around $250 but could fall below $200 by this time next year. The analyst also heard one anecdote about prices as low as $175 for some vendors in CWDM4, but suspects this data point is not representative of the broader market. Further, his industry checks suggest that competitor Intel (INTC) is being particularly aggressive on price and may have begun to supply key Applied customer Facebook (FB). Intel announced at ECOC it now has the capacity to make 1M transceivers a year and is launching 25G and 100G optics for mobile front haul application in the first quarter of 2019, Kisner noted. On the positive side, the analyst pointed out that he is hearing that demand for 100G CWDM4 transceivers remains “quite strong”.
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