Fiber Optic Networking has been in the news lately as the cloud moves toward 100 Gb transfer rates. This industry may be one of the hotter areas to invest in during the next year so it may be time to look at a few of the leaders. Today I want to dig into the fundamentals of Applied Optoelectronics as well as the technical aspects of its stock chart.
Applied Optoelectronics is a leading provider of fiber‑optic networking products and they serve three growing end-markets: Cable Television Broadband (CATV), fiber-to-the-home (FTTH), and internet data centers (Data Center). They design and manufacture a range of optical communications products employing their vertical integration strategy from laser chips, components, subassemblies and modules to complete turn-key equipment. The Company designs, manufactures and integrates their own analog and digital lasers using a proprietary Molecular Beam Epitaxy (MBE) fabrication process, which they believe is unique in their industry. The lasers they manufacture are proven to be reliable over time and highly tolerant of changes in temperature and humidity (delivering millions of hours service), making them well-suited to the CATV and FTTH markets where networking equipment is often installed outdoors.
All three of their end markets are driven by bandwidth demand fueled by the growth of network‑connected devices, that included video traffic, cloud computing and online social networking. To address this increased bandwidth demand, CATV and telecommunications service providers are competing directly against each other by providing bundles of voice, video and data services to their subscribers and investing to enhance the capacity, reliability and capability of their networks. The trend of rising bandwidth consumption also impacts the internet data center market, as reflected in the shift to higher speed server connections. As a result of these trends, fiber‑optic networking technology is becoming essential in all three of these target markets, as it is often the only economic way to deliver desired bandwidth.
Applied Optoelectronics is a leading provider of fiber‑optic networking products and they serve three growing end-markets: Cable Television Broadband (CATV), fiber-to-the-home (FTTH), and internet data centers (Data Center). They design and manufacture a range of optical communications products employing their vertical integration strategy from laser chips, components, subassemblies and modules to complete turn-key equipment. The Company designs, manufactures and integrates their own analog and digital lasers using a proprietary Molecular Beam Epitaxy (MBE) fabrication process, which they believe is unique in their industry. The lasers they manufacture are proven to be reliable over time and highly tolerant of changes in temperature and humidity (delivering millions of hours service), making them well-suited to the CATV and FTTH markets where networking equipment is often installed outdoors.
All three of their end markets are driven by bandwidth demand fueled by the growth of network‑connected devices, that included video traffic, cloud computing and online social networking. To address this increased bandwidth demand, CATV and telecommunications service providers are competing directly against each other by providing bundles of voice, video and data services to their subscribers and investing to enhance the capacity, reliability and capability of their networks. The trend of rising bandwidth consumption also impacts the internet data center market, as reflected in the shift to higher speed server connections. As a result of these trends, fiber‑optic networking technology is becoming essential in all three of these target markets, as it is often the only economic way to deliver desired bandwidth.
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Applied Optoelectronics is a vertically integrated company with a state-of–the-art semiconductor component fab at their USA Headquarters near Houston, Texas. Coupled with an SMT production line at their China operation, a high degree of manufacturing integration enables them to deliver performance with fast lead times at a competitive cost.
The Company's transceiver products feature lasers with superior performance and excellent reliability. The transceivers are designed in and manufactured from our Taiwan Division. Each division of the Company has assembled a world-class pool of talent, from optoelectronics professionals, to mechanical engineers, RF and digital circuit designers, all with the goal of developing best-in-class products.
Broad product lines make Applied Optoelectronics capable of extending its addressable market to more fiber optic applications. Equipped with excellent design capability, key in-house optical components, and volume manufacturing facilities, the Company offers a uniquely high level of price competiveness and performance.
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Applied Optoelectronics, Inc. designs, manufactures, and sells fiber-optic networking products primarily for Internet data center, cable television (CATV), and fiber-to-the-home (FTTH) networking end-markets. It offers optical modules, lasers, transmitters and transceivers, and turn-key equipment, as well as headend, node, and distribution equipment. The company sells its products to Internet data center operators, CATV and telecommunications equipment manufacturers, and Internet service providers through its direct and indirect sales channels worldwide. Applied Optoelectronics, Inc. was founded in 1997 and is headquartered in Sugar Land, Texas.
(Summary) (Company) (Chart)
| 16 April 2017 Price $45.30 1yr Target $63.33 Analysts 6 Dividend --- Payout Ratio --- 1yr Cap Gain 39.80% Yield --- 1yr Tot Return 39.80% P/E 26.20 PEG 1.50 Beta 2.82 | EPS (ttm) $1.73 EPS next yr $3.70 Forward P/E 12.24 EPS next 5yr 17.50% 1yr Price Support $64.75 Market Cap $877.01 Mil Revenues $260.70 Mil Earnings $31.20 Mil Profit Margin 11.96% Quick Ratio 1.80 Current Ratio 2.60 Debt/Equity 0.19 | 1yr RevGR 37.28% 3yr RevGR --- 5yr RevGR --- 1yr EarnGR 170.76% 3yr EarnGR --- 5yr EarnGR --- 1yr DivGR --- 3yr DivGR --- 5yr DivGR --- ROA 10.00% ROE 16.70% |
Operations
Applied Optoelectronics is a leading, vertically integrated provider of fiber-optic networking products, primarily for four networking end- markets: internet data center, cable television, or CATV, fiber-to-the-home, or FTTH, and telecommunications, or telecom. They design and manufacture a range of optical communications products at varying levels of integration, from components, subassemblies and modules to complete turn-key equipment.
In designing products for their customers, they begin with the fundamental building blocks of lasers and laser components. From these foundational products, they design and manufacture a wide range of products to meet our customers’ needs and specifications, and such products differ from each other by their end market, intended use and level of integration. They are primarily focused on the higher-performance segments within all four of our target markets, which increasingly demand faster connectivity and innovation.
The four end markets the Company targets are all driven by significant bandwidth demand fueled by the growth of network-connected devices, video traffic, cloud computing and online social networking. To address this increased bandwidth demand, CATV and telecommunications service providers are competing directly against each other by providing bundles of voice, video and data services to their subscribers and investing to enhance the capacity, reliability and capability of their networks. The trend of rising bandwidth consumption also impacts the internet data center market, as reflected in the shift to higher speed server connections. As a result of these trends, fiber-optic networking technology is becoming essential in all four of their target markets, as it is often the only economic way to deliver the desired bandwidth.
The internet data center market is the Company's largest and fastest growing market. Their customers in this market are generally large internet-based data center operators that they supply optical transceivers that plug into switches and servers within the data center and allow these network devices to send and receive data over fiber optic cables. The majority of the data center optical transceivers that they sell utilize their own lasers and subassemblies, and they believe that their in-house technology and manufacturing capability for these lasers and subassemblies gives them an advantage over many of their competitors who often lack either development or manufacturing capabilities for these advanced optical modules.
The CATV market is the Company's most established market, for which they supply a broad array of products including lasers, transmitters and transceivers, and turn-key equipment. Sales of headend, node and distribution equipment have contributed significantly to their revenue in recent years as a result of their ability to meet the needs of CATV equipment vendors who have continued to outsource both the design and manufacturing of this equipment. While equipment vendors have relied upon third parties to assemble portions of their products, within the past seven years certain of our customers have accelerated the outsourcing of the design and manufacturing of both headend equipment and node equipment to third parties. The shift is due in part to the sophisticated engineering expertise needed to perform this work. Applied Optoelectronics believes that their extensive high-speed optical, mixed-signal semiconductor and mechanical engineering capabilities position us well to benefit from these industry dynamics.
The Company's vertically integrated manufacturing model provides us several advantages, including rapid product development, fast response times to customer requests and control over product quality and manufacturing costs. The Company designs, manufactures and integrates their own analog and digital lasers using a combination of Metal Organic Chemical Vapor Deposition, or MOCVD, and their proprietary Molecular Beam Epitaxy, or MBE, fabrication process, which they believe is unique to their industry. The Company manufactures the majority of the laser chips and optical components that are used in their products. The lasers they manufacture are proven to be reliable over time and highly tolerant of changes in temperature and humidity, making them well-suited to the CATV and FTTH markets where networking equipment is often installed outdoors.
Applied Optoelectronics is a leading, vertically integrated provider of fiber-optic networking products, primarily for four networking end- markets: internet data center, cable television, or CATV, fiber-to-the-home, or FTTH, and telecommunications, or telecom. They design and manufacture a range of optical communications products at varying levels of integration, from components, subassemblies and modules to complete turn-key equipment.
In designing products for their customers, they begin with the fundamental building blocks of lasers and laser components. From these foundational products, they design and manufacture a wide range of products to meet our customers’ needs and specifications, and such products differ from each other by their end market, intended use and level of integration. They are primarily focused on the higher-performance segments within all four of our target markets, which increasingly demand faster connectivity and innovation.
The four end markets the Company targets are all driven by significant bandwidth demand fueled by the growth of network-connected devices, video traffic, cloud computing and online social networking. To address this increased bandwidth demand, CATV and telecommunications service providers are competing directly against each other by providing bundles of voice, video and data services to their subscribers and investing to enhance the capacity, reliability and capability of their networks. The trend of rising bandwidth consumption also impacts the internet data center market, as reflected in the shift to higher speed server connections. As a result of these trends, fiber-optic networking technology is becoming essential in all four of their target markets, as it is often the only economic way to deliver the desired bandwidth.
The internet data center market is the Company's largest and fastest growing market. Their customers in this market are generally large internet-based data center operators that they supply optical transceivers that plug into switches and servers within the data center and allow these network devices to send and receive data over fiber optic cables. The majority of the data center optical transceivers that they sell utilize their own lasers and subassemblies, and they believe that their in-house technology and manufacturing capability for these lasers and subassemblies gives them an advantage over many of their competitors who often lack either development or manufacturing capabilities for these advanced optical modules.
The CATV market is the Company's most established market, for which they supply a broad array of products including lasers, transmitters and transceivers, and turn-key equipment. Sales of headend, node and distribution equipment have contributed significantly to their revenue in recent years as a result of their ability to meet the needs of CATV equipment vendors who have continued to outsource both the design and manufacturing of this equipment. While equipment vendors have relied upon third parties to assemble portions of their products, within the past seven years certain of our customers have accelerated the outsourcing of the design and manufacturing of both headend equipment and node equipment to third parties. The shift is due in part to the sophisticated engineering expertise needed to perform this work. Applied Optoelectronics believes that their extensive high-speed optical, mixed-signal semiconductor and mechanical engineering capabilities position us well to benefit from these industry dynamics.
The Company's vertically integrated manufacturing model provides us several advantages, including rapid product development, fast response times to customer requests and control over product quality and manufacturing costs. The Company designs, manufactures and integrates their own analog and digital lasers using a combination of Metal Organic Chemical Vapor Deposition, or MOCVD, and their proprietary Molecular Beam Epitaxy, or MBE, fabrication process, which they believe is unique to their industry. The Company manufactures the majority of the laser chips and optical components that are used in their products. The lasers they manufacture are proven to be reliable over time and highly tolerant of changes in temperature and humidity, making them well-suited to the CATV and FTTH markets where networking equipment is often installed outdoors.
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Products
Applied Optoelectronics' products include an array of optical communications solutions at varying levels of integration. The Company begins from the fundamental building blocks of lasers and laser components. From these foundational products, they design and manufacture a wide range of products from optical modules to complete turn-key equipment. The Company designs their products to target customers in identified markets to meet their needs and specifications.
The Company's components often incorporate one or more of their optical laser chips inside a precision housing that provides mechanical protection as well as standardized electrical contacts. More complex optical components may also include optical filters or other optical elements by which optical signals are routed internally within the component. These more advanced components may also include coolers, heaters and sensors that allow the temperature of the laser chip to be measured and controlled. The Company manufactures the majority of the laser chips and optical components that are used in their own products.
At the next level of integration, their module or sub-assembly products typically contain one or more optical components and some additional control circuitry. At the highest level of integration and complexity, their equipment products typically contain one or more optical components, modules and additional electronic control circuitry required to enable these subsystems to operate independently.
My Strategy Going Forward
This company doesn't fit into a Dividend Growth Strategy so if that's your strategy, you might just want to look elsewhere. Applied Optoelectronics is also a relatively small company in a very competitive environment. But despite that, it's in an industry that's finally growing into its own as the need for bandwidth is increasing exponentially and spreading beyond a centralized cloud to a distributed cloud.
Now I don't pretend to have an in-depth knowledge of the fiber optics industry, but I analyze stocks based on their fundamentals, technicals or both. In this case it looks like the analysts are calling for a 66% increase in the stock price over the next 12 months. Projections based solely on the projected earnings growth rate still predict a 40+% return over 12 months. And that ain't bad.
Add in the possibility that consolidation may occur in this industry as demand exceeds the capacity of any one company and owning a piece of Oclaro starts to make sense, from a speculative view. Therefore, I intend to accumulate a small position in this company and see where it goes. As long as it continues to climb I'll hold on and perhaps even add to my position. Finally, I'll also be looking at a few other companies in this space for additional positions. This really looks like an interesting area to own a piece of over the next few years.
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