Shares of Applied Optoelectronics AAOI were down more than 5% in morning trading Tuesday after an analyst note suggested that two of its largest customers could be taking their business to a key rival. AAOI has now tumbled more than 60% from the highs it reached in July.
According to Rosenblatt’s Jun Zhang, both Facebook FB and Amazon AMZN may be transferring a share of their optical equipment load to InnoLight Technology Corporation, a subsidiary of China’s Shandong Zhongji Electrical Equipment Company.
Zhang’s note suggests that the shift to InnoLight is inspired by the Chinese government’s push to grow its presence in the optical component industry amid growing demand, especially in the 5G market. Domestic tech giants Huawei and ZTE may opt for internal client-side modules in 2018, for example.
Applied Optoelectronics provides fiber-optic networking solutions, primarily for the cable television, fiber-to-the-home, and datacenter markets. The company manufactures products at varying levels of integration—from components and modules to complete turn-key equipment.
As for now, Applied sees about 80% of its total revenue from its datacenter operations. The firm’s three largest customers in this segment are Facebook, Amazon, and Microsoft MSFT.
Shares of AAOI soared in the first six months of 2017 as investors recognized that the growth of these companies’ cloud operations should help suppliers like Applied, but the stock has come crashing back down amid concerns that its customers are fleeing.
As Zacks Equity Strategist Tracey Ryniec highlighted in a recent “Bear of the Day” profile of AAOI, management expects fourth quarter revenue to be flat to slightly lower than its already-soft Q3 results. “Given the lower fourth quarter guidance of just $81 to $90 million, it has likely seen erosion from either Facebook or Microsoft in the fourth quarter,” she added.
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