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Here's Why Applied Optoelectronics Inc. Shares Soared Today

What happened

Shares of Applied Optoelectronics (NASDAQ: AAOI) are on fire in Wednesday's trading session, rising 17.7% as of 2:45 p.m. EST. Tuesday night's third-quarter report beat Wall Street's estimates across the board, making it easy to embrace the stock on Wednesday.

So what

The maker of optical products, from low-level components to turnkey networking systems, saw top-line revenues rise 27% year over year, landing at $88.9 million. The growth spurt was driven by strong orders from data center and cable TV customers.

On the bottom line, adjusted earnings surged 184% higher, stopping at $1.08 per diluted share. The revenue gains were amplified by the mathematical fact that the year-ago period was a low point in AOI's recent history where fixed costs nearly zeroed out the bottom line entirely.

Analysts would have settled for earnings of $1.02 per share on sales near $88.5 million. Not a blowout, but still a significant surprise.

Image source: Getty Images.

Now what

Looking ahead, AOI's management expects fourth-quarter sales to hold almost completely steady year over year at roughly $85.5 million. Earnings should rise just 5% higher to $0.88 per share.

Here, your average analyst had been expecting earnings of $0.96 per share on sales of approximately $83.6 million. That type of mixed message doesn't always sit well with investors, often triggering a price cut even if the reported results came in strong.

Of course, investors approached AOI's report with caution. At Tuesday's market close, share prices had fallen a hair-raising 63% from early August's 52-week highs due to long-term worries about the company losing major contracts to rivals. This report didn't exactly prove those fears wrong, but management did provide a few soothing quotes about the competitive landscape.

"We remain a major supplier to all of our major customers for their long-reach transceiver needs and intra-data center applications," said CFO and chief strategy officer Stefan Murry. "We remain engaged with all those customers. We have orders from all the major customers that we have."

In a broader sense, the fiber-optic networking industry is knee deep in a shift toward next-generation components with higher data transfer rates, making every supplier's results lumpy and unpredictable until the new standards have been set. I expect Applied Optoelectronics to rise above its near-term challenges as the market steps up to this new product generation in support of 5G wireless networks.

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Anders Bylund has no position in any of the stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.