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Why Applied Optoelectronics Inc. Stock Is Plunging Today

What happened

Shares of Applied Optoelectronics (NASDAQ: AAOI) are plunging today, trading 26% lower as of 12:32 p.m. EDT, after the company reported second-quarter earnings.

So what

The maker of lasers and transceivers used to build fiber-optic networking equipment released second-quarter results on Thursday night. Earnings rose nearly ninefold compared to the year-ago quarter, landing at $1.54 per share. Sales more than doubled from $55.3 million to $117 million. Both figures were well ahead of Wall Street's projections, which called for earnings of $1.32 per share on revenue near $116 million.

So the reported numbers were better than expected, and third-quarter earnings guidance of roughly $1.37 per share also topped the current analyst view of $1.31 per share. However, revenue guidance stopped at 1 million, falling short of analysts' $123 million consensus estimate. It looks like the soft revenue projection is outweighing the positive surprises today.

Image source: Getty Images.

Now what

Applied Optoelectronics raced into this earnings report on a full head of steam. Even after today's drastic haircut, the stock still trades 210% higher year to date and offers a 460% shareholder return over the last 52 weeks.

The soft third-quarter revenue outlook is based on lower sales of the aging 40-gigabit transceiver portfolio. Growth in the newer 100G product line will eventually erase the 40G downtrend, but product generation changeovers can hurt in the short term. In the second quarter, 39% of AOI's data center sales came from the 100G lineup, which is growing at a 62% year-over-year pace. That's up from a 30% revenue share in the first quarter and 20% two quarters ago.

The future belongs to AOI's 100G products, and the company is already first to market with 200-gigabit transceivers for data center communications. Its largest customers are expanding their cloud computing sales at breakneck speeds, which requires heavy investments in fiber-based networking tools. I would pay more attention to AOI's stellar one-year market returns than to this sudden correction, because this company (and the fiber-optic market overall) is going places.

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