Why Applied Optoelectronics Inc. Stock Jumped on Wednesday

MarketsMotley Fool

What happened

Shares of Applied Optoelectronics (NASDAQ: AAOI) closed 14.5% higher on Wednesday, having recorded a peak gain of 17.2% earlier in the trading session. An analyst firm issued an optimistic report on the stock based on good-looking checks among AAOI's data center customers.

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So what

Rosenblatt analyst Jun Zhang expects a second-quarter rebound in AAOI's top line. Major customers Facebook and Amazon.com appear to be buying more of AAOI's high-speed optical transceivers these days, giving less of their business to China-based rival Zhongji Innolight.

"We believe that AAOI is seeing improved traction due to its aggressive pricing and ongoing quality issues at Innolight," the analyst wrote. "During our recent trip to Asia, we found that server demand is very strong and we believe data center deployments in both China and US are ramping quickly."

Now what

If Zhang's analysis is correct, this would be the end of a difficult chapter in AAOI's history and perhaps the start of another strong growth spurt like the one in late 2016 and early 2017. The stock still trades a mind-boggling 72% below its 52-week highs, even after accounting for today's strong bounce. In short, optical networking stocks in general look tempting right now -- and Applied Optoelectronics more so than most of its rivals.

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