Tuesday, 20 June 2017

AAOI: Strong Buy Price Target $250; Short Squeeze Imminent

On May 6th we initiated a strong buy call on Applied Optoelectronics (AAOI) with our article "AAOI: Eight Reasons To Expect This Tech Unicorn To Double By The End Of 2017". The stock moved from $55.96 to as high as $75.59 before pulling back to the $62 range despite excellent news of increased laser production. Today represents an excellent buying opportunity as new 52-week highs should be coming over the next few days.

Our follow up piece on May 10th called "Fund Buying And Short Interest Will Lead To A Massive Squeeze on AAOI" gives readers even more reason to be bullish on this great company and one on May 30th called "AAOI Would be $200 If It Was Valued Like NVDA" shows that AAOI is far undervalued when compared to NVIDIA Corporation (NVDA) which has been on a tremendous run thanks to the sharp increase in data center demand. If you like our picks make sure to follow our blog by clicking the follow button on the top of the left hand panel. We are up to 234 followers despite the relatively few articles that we publish. We think this good growth in followers is indicative of people liking our picks and research.

It has become apparent that shorts are getting very desperate on AAOI and will try any type of seedy tactic to bring it down. Some no-name firm called BWS Financial called a $25 target on AAOI citing a nonsensical reason with 100G pricing about to be destroyed. BWS Financial is led by Hamed Khorsand who is wrong more often than he is right, with a success rate of only 46% according to TipRanks. So a short call on AAOI by him should be seen as a 54% bullish sign!

BWS and associates look to be excessively desperate to cover their short with this facade. Short interest ballooned to 8.3 million at the end of May as the stock price was on its way up to $75. The float is only 18 million so now the short interest is closing in on 50%. Usually a stock with that high level of a short interest is a biotech or some other junior company that is losing lots of money and investors figure that they will need to finance at below market levels. But AAOI is forecasted to have a $4.71 EPS in 2017 and $5.21 EPS in 2018. These shorts are blindly shorting a stock that has moved a lot, paying no attention to the fundamentals behind the move. Oh well, it's their funeral.

Instead of a $25 target, it's possible that the team at BWS made a mistake and meant a $250 target, given the latest run on NVDA. NVDA's financial ratios according to Yahoo Finance can be seen here. AAOI's can be seen here. While AAOI has been on a huge run, what investors must understand is that it is STILL undervalued. Look at this chart comparing NVDA to AAOI:

Using traditional valuation metrics, AAOI is two to five times undervalued relative to NVDA. AAOI's trailing P/E is 22 which is reasonable for a "normal" growth stock. However, this opportunity with the datacenters has been proven to be anything but normal. NVDA is trading at a trailing P/E of 53 and it has a market cap of $95 billion compared to AAOI's which is just over $1 billion. The smaller company is usually valued at a more aggressive multiple to reflect the fact that its growth rate should be higher.

The forward P/E takes into account expected near-term growth and we see the difference is even more extreme. NVDA's forward P/E is 46 while AAOI's is a bargain basement 12, meaning that AAOI is nearly four times as undervalued. Judging by forward P/E, AAOI's stock price should be $237 to be comparable to NVDA. The PEG ratio takes into account expect 5-year growth. This shows the most extreme difference between the two companies with AAOI being over five times undervalued versus NVDA with a fair stock price being $330. The revenue multiple and price to book value also shows that AAOI is over three times undervalued compared to NVDA.

If we average these five figures, AAOI would deserve a stock price of $228.96 just to come in line with NVDA's valuation. AAOI is a highly undervalued stock and it has a lot more room to move. Never mind $100 which was our original target and the target of analysts, AAOI deserves to be $250 when compared to the other hot stock in the datacenter industry.

Disclosure: We are long AAOI

If you are interested in penny stock picks, check out Microcap Millionaires.

If you're interested in trading options, both, calls and puts on some large cap stocks, check out binaryoptionsprosignals.com.

Learn to trade stocks, options, commodities and forex with Trader Review.

If you are interested in dividend stocks and return analysis, Then dividendstocksonline.com or Dividend Stocks Rock are for you.

If you're interested in gold, this WSW special report or the Goldmasterinvesting.com Ocean Of Gold Report are for you.

No comments:

Post a Comment