After Leaping 27% Applied Optoelectronics, Inc. (NASDAQ:AAOI) Shares Are Not Flying Under The Radar

Applied Optoelectronics, Inc. (NASDAQ:AAOI) shareholders are no doubt pleased to see that the share price has bounced 27% in the last month, although it is still struggling to make up recently lost ground. Unfortunately, the gains of the last month did little to right the losses of the last year with the stock still down 25% over that time.

Following the firm bounce in price, given close to half the companies operating in the United States' Communications industry have price-to-sales ratios (or "P/S") below 1.1x, you may consider Applied Optoelectronics as a stock to potentially avoid with its 2x P/S ratio. Although, it's not wise to just take the P/S at face value as there may be an explanation why it's as high as it is.

View our latest analysis for Applied Optoelectronics

What Does Applied Optoelectronics' P/S Mean For Shareholders?

While the industry has experienced revenue growth lately, Applied Optoelectronics' revenue has gone into reverse gear, which is not great. One possibility is that the P/S ratio is high because investors think this poor revenue performance will turn the corner. You'd really hope so, otherwise you're paying a pretty hefty price for no particular reason.

If you'd like to see what analysts are forecasting going forward, you should check out our free report on Applied Optoelectronics.

How Is Applied Optoelectronics' Revenue Growth Trending?

There's an inherent assumption that a company should outperform the industry for P/S ratios like Applied Optoelectronics' to be considered reasonable.

Retrospectively, the last year delivered a frustrating 2.8% decrease to the company's top line. As a result, revenue from three years ago have also fallen 11% overall. Therefore, it's fair to say the revenue growth recently has been undesirable for the company.

Shifting to the future, estimates from the four analysts covering the company suggest revenue should grow by 62% over the next year. That's shaping up to be materially higher than the 7.7% growth forecast for the broader industry.

In light of this, it's understandable that Applied Optoelectronics' P/S sits above the majority of other companies. It seems most investors are expecting this strong future growth and are willing to pay more for the stock.

What Does Applied Optoelectronics' P/S Mean For Investors?

Applied Optoelectronics' P/S is on the rise since its shares have risen strongly. We'd say the price-to-sales ratio's power isn't primarily as a valuation instrument but rather to gauge current investor sentiment and future expectations.

We've established that Applied Optoelectronics maintains its high P/S on the strength of its forecasted revenue growth being higher than the the rest of the Communications industry, as expected. Right now shareholders are comfortable with the P/S as they are quite confident future revenues aren't under threat. Unless the analysts have really missed the mark, these strong revenue forecasts should keep the share price buoyant.

Plus, you should also learn about these 4 warning signs we've spotted with Applied Optoelectronics (including 1 which can't be ignored).

If these risks are making you reconsider your opinion on Applied Optoelectronics, explore our interactive list of high quality stocks to get an idea of what else is out there.

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This article by Simply Wall St is general in nature. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. We aim to bring you long-term focused analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material. Simply Wall St has no position in any stocks mentioned.