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Shorts
#1
Nevertheless, those people in the industry who have direct access to our second blog by following us there, realized that we felt compelled to publish the following article the other day: “Mind-Boggling Amount of Ignorance About Optics on the Street?” It was a directly a reflection of a “very close to an obscene” valuation of Applied Optolectronics, which has been hovering around the $2 billion mark for a while, and in our opinion, has been spurred on by too many individuals influencing optics stock prices, who are disingenuousunknowledgeable, or unwilling to make basic distinctions between companies.  Even with the article, which was connected with that post, which made the case for AOI’s market cap being too high, we thought was based on a superficial analysis. The worst part of AOI’s present market cap is that it is more outrageous than even that of Acacia Communications about a year ago.

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#2

Not sure the market cap was the main red flag, before the Amazon slowdown the shares had gone up a lot, but so had revenues and profits and they didn't look extremely valued, especially for a company growing at this pace and enjoying some of the best margins in the industry.

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#3

Short declining? Some argue on the basis of the chart below that this is happening (the chart comes from this website):

I don't think this indicates anything:

  • The red stuff are new short positions, even if these are declining they could actually add to the existing short position.
  • Unless we have data on short covering, no firm (if any) conclusions can be drawn.

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#4
Thanks Admin. It's extra hard to guesstimate what is really going on here. New shorts could mean either that the shorts 'know' about more bad stuff going to happen or that they've been able to successfully sell the short thesis to new gullible traders. After all the shorts need to cover their substantial positions somehow and their best chance is to continue spreading fear, doubt and uncertainty. As usual I'm not selling so they got to convince other shareholders to part with their shares
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#5

'baff' pid='81258' datel Wrote:Thanks Admin. It's extra hard to guesstimate what is really going on here. New shorts could mean either that the shorts 'know' about more bad stuff going to happen or that they've been able to successfully sell the short thesis to new gullible traders. After all the shorts need to cover their substantial positions somehow and their best chance is to continue spreading fear, doubt and uncertainty. As usual I'm not selling so they got to convince other shareholders to part with their shares

For me, I'm 90% certain that there is no other bad stuff. There is Amazon, and that could continue for a while, but most of it should be priced in as Amazon is already down to 10% of revenue in Q3. There is nothing in publicly available info to suggest that Applied Opto is losing other customers or can't compete in 100G, or that there is accelerated price erosion, or that their yield on the lasers is low, or any of the other things the shorts have argued.

The 100G market is actually growing very fast, prices are holding up pretty well (per earnings conferences from other companies like Finisar) and Applied Opto is both growing sales of 100G and sales to other companies at a very healthy clip.

So I actually don't think there is more bad news besides the possibility that the Amazon situation might continue for one or two quarters more.

But do I know that for a fact? No, and of course lots of people were surprised by the sudden Amazon demand decline, very much including Applied Opto's management. But not that short guy on StockTwits.

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#6
No doubt we will see how it develops. I guess I'm 90% optimistic too. I'm not only optimistic but I'm very patient too. Although no absolute my favourite holding time is forever. I still got the first stocks I bought in the early nineties.
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#7

'baff' pid='81262' datel Wrote:No doubt we will see how it develops. I guess I'm 90% optimistic too. I'm not only optimistic but I'm very patient too. Although no absolute my favourite holding time is forever. I still got the first stocks I bought in the early nineties.

Yes, good luck!

We didn't like it mainly because we don't want to invest in stuff where other parties obviously have some kind of inside track and have massively bet against us, even if we think most of their public utterances is bluff. At least based on what is publicly known. That simply is an uncomfortable situation.

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#8

I'm not sure all this optimism is warranted:

  • Management has poor visibility
  • It doesn't look like the shorts have covered, or have even started to do that
  • The shorts seemed to have a better handle on the situation than management.

I would sit it out and wait until the Q3 figures at the minimum.

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#9

Here is a guess. Lumentum saw softness in datacenter revenues, so did Oclaro. The whole sector is down on this and down quite significantly (Lumentum is saved by it's 3D sensing prospects). But Applied Opto is up 7%.

We think this means the shorts are starting to cover.

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#10

There might be another explanation for the sudden enthusiasm for AAOI shares (although much of that has no petered out) on a day when the whole sector sells off brutally on surprising softness in demand from datacenters, which is the main market AAOI sells into. Here is commentator mtachjian:

1)Oclaro reiterated what Aoi said....DC is "Lumpy" and they have "little to no visibility". They gave an interesting reason I hadn't heard yet, which jives with Jays thoughts that this was an unusually low quarter. They stated that they thought data center customers acquired too much inventory, too quickly so they wouldn't be caught short like last year. Now have a slight buildup that they need to work through. So not really a transition event. Its a relief to hear 2 separate companies say the same thing about visibility and lumpy orders.
2)"Shift to CWDM4" --- Oclaro is seeing a buildup in their LR4 products as data centers are shifting to CWDM4(this is AOis strength and they are the market leader). Oclaro looked like they had an Aoi like healthy growth in 100G revenues(although they have a different mix)
3)Oclaro is NOT a direct player in the CWDM4 market but they want to be(who doesn't?). They indicated that they will know next quarter if they can provide transceivers. If not, they will just supply lasers to other companies that make the CWDM4 transceivers. They were questioned on this point several times. Greg indicated that 'pricing is very tough in CWDM4'. That means AOis claim to being 'much cheaper' than competitors in CWDM4 is accurate as Olcaro is not sure they can compete with pricing.
4)Intel and Silicon Photonics. Oclaro was asked directly about this. They said that they have seen ZERO COMPETITION from SiP. That most SiP business is lower end and in the PSM4 market. As an added aside, Many people dont ever mention that AOi has had a team working on silicon photonics for years. They have this tech. They feel It is a useful technically for very short distances, but as distances increase, it becomes less price competitive to other lasers. In total, it seems we have some confirmations. Data Centers want more of what AOi makes(CWDM4). Some data center customers may have 'overeaten' the last 2 qtrs and have to digest inventory. SiPhotonics from Intel is not a competitor. The pricing offered by Aoi at 100G CWDM4 is very 'tough to beat'(at 40+% margins).

Applied Optoelectronics: Thoughts On Competition, Q4, And Staying Long - Applied Optoelectronics, Inc. (NASDAQ:AAOI) | Seeking Alpha

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