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Why Rosenblatt is Rooting for AAOI Stock Ahead of Earnings

Lillian Currens

A bull note from Rosenblatt has the shares of fiber-optic networking provider Applied Optoelectronics Inc (NASDAQ:AAOI) up 9.5% to trade at $11.60, set for its highest close in over a month. The analyst upgraded the stock to "buy" from "neutral," and lifted its price target to $13 from $10, expecting the company to forecast upbeat fourth-quarter revenue growth on improving demand from Microsoft (MSFT) and Amazon.com (AMZN). Rosenblatt also predicted better fundamentals in the next year as the 5G landscape continues to improve. 

This optimism comes just one day before Applied Optoelectronics' third-quarter earnings report, due out after the close tomorrow, Nov. 6. The stock tends to do well the day after earnings, closing higher five times in the last eight quarters -- including a 6.8% pop in August, and a 12% climb one year ago. This time around, the options market is pricing in a huge 19.8% post-earnings swing, almost double the stock's next-day average move of 10.9% from the past two years. 

Speaking of the options pits, they're bustling with activity today. So far, 2,916 calls and 2,440 puts have exchanged hands -- two times what's typically seen at this point. The weekly 11/8 10-strike put is especially popular, with contracts being sold to open, as short-term traders possibly look to profit on a post-earnings volatility crush.

Overall, things have been bullish at the International Securities Exchange (ISE), Cboe Options Exchange (CBOE), and NASDAQ OMX PHLX (PHLX), where 3.81 calls have been bought to open for every put during the last two weeks. This ratio sits in the 76th percentile of its annual range, indicating a bigger-than-usual appetite for calls over puts of late. 

More analysts have room to follow in Rosenblatt's bullish footsteps, should this positive price action keep up. Prior to today, only one analyst considered AAOI a "buy," while seven called it a "hold" or worse. What's more, the consensus 12-month target price of $10.50 is a 9.6% discount to current levels, leaving the door wide open for more tailwind-inducing upward revisions. 

While AAOI is still down nearly 25% for the year, the stock is on course to close atop its 200-day moving average for the first time since September 2018, as well as its 180-day moving average -- which has put a cap on several recent attempts at a rally. The security is eyeing its third straight win, too, up roughly 28.9% since bouncing off the $9 region late last week. 

AAOI Nov 5