Applied Optoelectronics AAOI shares have plunged 51% over the past three months, underperforming the Zacks Computer and Technology sector, the Zacks Electronics - Semiconductors industry and the S&P 500 index’s decline of 10.2%, 21.2% and 4.1%, respectively.

AAOI Three-Month Price Performance Chart

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The recent decline in AAOI’s stock price was due to growing concern over the company’s declining bottom line. On Feb. 26, it reported non-GAAP net loss of $1 million for the fourth quarter of 2024 and guided that it might incur a loss of $3.6 million in the first quarter of 2025.

Following the dismal outlook, the stock has witnessed sharp downward estimate revisions, reflecting near-term pessimism for the stock among analysts. The Zacks Consensus Estimate for AAOI’s 2025 EPS has been downgraded by 30 cents to 64 cents in the past 30 days.

Find the latest EPS estimates and surprises on Zacks Earnings Calendar.

The escalating trade war between the United States and China has also turned investors increasingly cautious about Applied Optoelectronics’ near-term prospects. AAOI’s business is heavily dependent on China. In 2024, 2023 and 2022, AAOI's revenues from products manufactured at its China plant accounted for 44.8%, 19.9% and 23%, respectively. The U.S. government’s latest tariff policy with a 10% additional tariff on imports from China could hurt its sales.

AAOI Faces Competitive Pressure From Industry Leaders

The global fiber-optic networking market includes old and established players like Corning GLW, Cisco CSCO and Lumentum Holdings Inc. LITE, which are bringing constant innovation.

Corning is a leading player in the fiber optics space with products like SMF-28 Ultra, Corning Infinicor 300 and its ClearCurve lineup. Both Cisco and Lumentum offer photonics-based products for 400G and 800G systems.

Cisco’s photonics portfolio comprises QSFP-DD 400G ZR-plus, QSFP-DD 400G ZR and QSFP-DD 400G ER1. Lumentum offers Indium Phosphide (InP)-based 130+ GBaud Smart TROSA, 200G per Lane InP Lens Integrated Photodiode and Ultra-High Power 400mW 1310nm DFB Laser.

To keep up with the changing market conditions and competitive pressure, Applied Optoelectronics is heavily spending on its research and development (R&D), which is driving operational costs higher. Rising expenses have been weighing on Applied Optoelectronics’ gross margin. The company’s gross margin contracted 470 basis points in the fourth quarter of 2024.

However, not everything is gloom and doom for Applied Optoelectronics.

Strong Traction in Key End Markets Drives AAOI’s Growth

Organizations worldwide are swiftly transitioning from legacy data centers to AI-driven infrastructures, fueling strong growth in the CATV and Internet data center markets. As these data centers demand significantly higher workloads critical for next-generation architectures, AAOI is benefiting from the growing demand for its 400G and 800G products that deliver high-speed optical interconnect solutions.

Applied Optoelectronics is seeing strong demand for its high-speed optical interconnects from hyperscale customers optimizing their networks. With the hyperscale computing market projected to witness a 21.7% CAGR to $109.2 billion by 2028, AAOI has significant expansion opportunities.

The shift to data over cable service interfaces 4.0 architecture in the CATV market is also boosting demand for high-bandwidth networking, driving sales of AAOI’s 1.8 GHz amplifiers and supporting strong growth projections.

The consensus estimate for AAOI’s 2025 revenues is pegged at $526.6 million, indicating a year-over-year increase of 111.2%.

Conclusion: Hold AAOI for Now

AAOI is well-positioned to gain from the growing fiber-optics networking market due to its growing use across emerging AI, hyperscale computing and legacy markets. However, the rising costs due to increased R&D and shipping expenditures are weighing on its margins.

Considering all these factors, it is prudent to retain this Zacks Rank #3 (Hold) stock at present. You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

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Cisco Systems, Inc. (CSCO) : Free Stock Analysis Report

Corning Incorporated (GLW) : Free Stock Analysis Report

Applied Optoelectronics, Inc. (AAOI) : Free Stock Analysis Report

Lumentum Holdings Inc. (LITE) : Free Stock Analysis Report

This article originally published on Zacks Investment Research (zacks.com).

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