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How Weak Guidance Crushed Roku and Applied Opto Shares

Ryan McQueeney
Is (CY) Outperforming Other Computer and Technology Stocks This Year?

A quick glance at Thursday morning’s biggest movers reveals that video-streaming hardware maker Roku ROKU and fiber-optic equipment supplier Applied Optoelectronics AAOI are among the day’s worst losers in the wake of their respective earnings reports.

But a closer look at each of these reports, which were both released after the closing bell on Wednesday, does not necessarily paint a disastrous picture. Roku posted a surprise non-GAAP profit, surpassing our consensus estimate in just its second quarter as a publicly-traded company, while Applied Opto managed to beat bottom-line estimates despite slightly disappointing revenues.

Nevertheless, shares of both ROKU and AAOI opened more than 20% lower on Thursday morning, and while intraday trading has Roku trending higher and Applied Opto slipping further into the red, investors must feel disappointed by the reports.

So what caused these sell-offs? The answer lies beyond each companies latest results. The concern for Roku and Applied Opto appears to be centered on their respective outlooks for the upcoming fiscal periods.

Roku announced that it expects Q1 revenues in the range of $120 to $130 million. Heading into the report, our consensus estimate was calling for the company to witness Q1 revenues of $129.9 million, so we will likely see analysts move that prediction lower to better match Roku’s own expectations (also read: Roku Crushes Earnings Estimates, Stock Tumbles on Soft Q1 Guidance).

There also seems to be a concern that Roku could find itself in a pricing war soon. The streaming hardware firm reported lower revenues in its device business in the fourth quarter, and while that has not made an impact on overall results yet, the assumption is that it could drive Roku to lower prices to undercut competitors like Apple AAPL and Google GOOGL.

Meanwhile, Applied Opto’s guidance was even bleaker. The fiber-optics giant expects Q1 revenues in the range of $67.0 million to $71.0 million and non-GAAP earnings in the range of $0.28 to $0.34. Before that announcement, our consensus estimates were calling for Q1 revenues of $88.4 million and earnings of $0.74 per share (also read: Applied Optoelectronics Tops Earnings Estimates, Stock Falls on Sluggish Guidance).

AAOI was once a soaring stock thanks to the excitement around its communications equipment and the rise in demand from internet companies upgrading their cloud infrastructure. But competition has heated up and Applied Opto appears to be shedding key customers.

The moral of the story here is that investors in today’s market are far more concerned about guidance than just about any other detail in a company’s earnings report. Positive earnings surprises are great, but a “beat and raise” is the new standard.

Want more market analysis from this author? Make sure to follow @Ryan_McQueeney on Twitter!

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