The analysts might have been a bit too bullish on Applied Optoelectronics, Inc. (NASDAQ:AAOI), given that the company fell short of expectations when it released its quarterly results last week. Revenues missed expectations somewhat, coming in at US$40m, but statutory earnings fell catastrophically short, with a loss of US$0.83 some 82% larger than what the analysts had predicted. Following the result, the analysts have updated their earnings model, and it would be good to know whether they think there's been a strong change in the company's prospects, or if it's business as usual. So we gathered the latest post-earnings forecasts to see what estimates suggest is in store for next year.
Following the latest results, Applied Optoelectronics' ten analysts are now forecasting revenues of US$219.9m in 2020. This would be a huge 23% improvement in sales compared to the last 12 months. The loss per share is expected to greatly reduce in the near future, narrowing 55% to US$1.62. Before this earnings announcement, the analysts had been modelling revenues of US$209.2m and losses of US$1.34 per share in 2020. While this year's revenue estimates increased, there was also a loss per share expectations, suggesting the consensus has a bit of a mixed view on the stock.
The average price target rose 17% to US$10.13, even thoughthe analysts have been updating their forecasts to show higher revenues and higher forecast losses. Fixating on a single price target can be unwise though, since the consensus target is effectively the average of analyst price targets. As a result, some investors like to look at the range of estimates to see if there are any diverging opinions on the company's valuation. There are some variant perceptions on Applied Optoelectronics, with the most bullish analyst valuing it at US$12.00 and the most bearish at US$7.50 per share. Analysts definitely have varying views on the business, but the spread of estimates is not wide enough in our view to suggest that extreme outcomes could await Applied Optoelectronics shareholders.
Looking at the bigger picture now, one of the ways we can make sense of these forecasts is to see how they measure up against both past performance and industry growth estimates. It's clear from the latest estimates that Applied Optoelectronics' rate of growth is expected to accelerate meaningfully, with the forecast 23% revenue growth noticeably faster than its historical growth of 4.5%p.a. over the past five years. By contrast, our data suggests that other companies (with analyst coverage) in a similar industry are forecast to grow their revenue at 4.2% per year. Factoring in the forecast acceleration in revenue, it's pretty clear that Applied Optoelectronics is expected to grow much faster than its industry.
The Bottom Line
The most important thing to note is the forecast of increased losses next year, suggesting all may not be well at Applied Optoelectronics. Happily, they also upgraded their revenue estimates, and are forecasting revenues to grow faster than the wider industry. There was also a nice increase in the price target, with the analysts clearly feeling that the intrinsic value of the business is improving.
With that in mind, we wouldn't be too quick to come to a conclusion on Applied Optoelectronics. Long-term earnings power is much more important than next year's profits. We have forecasts for Applied Optoelectronics going out to 2024, and you can see them free on our platform here.
Plus, you should also learn about the 2 warning signs we've spotted with Applied Optoelectronics (including 1 which is significant) .
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