Applied Optoelectronics, Inc. (NASDAQ:AAOI) Looks Just Right With A 75% Price Jump

Applied Optoelectronics, Inc. (NASDAQ:AAOI) shares have continued their recent momentum with a 75% gain in the last month alone. The last month tops off a massive increase of 183% in the last year.

After such a large jump in price, given around half the companies in the United States' Communications industry have price-to-sales ratios (or "P/S") below 2x, you may consider Applied Optoelectronics as a stock to avoid entirely with its 5.4x 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 so lofty.

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See our latest analysis for Applied Optoelectronics

How Has Applied Optoelectronics Performed Recently?

With revenue growth that's superior to most other companies of late, Applied Optoelectronics has been doing relatively well. It seems the market expects this form will continue into the future, hence the elevated P/S ratio. If not, then existing shareholders might be a little nervous about the viability of the share price.

Keen to find out how analysts think Applied Optoelectronics' future stacks up against the industry? In that case, our free report is a great place to start.

How Is Applied Optoelectronics' Revenue Growth Trending?

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

If we review the last year of revenue growth, the company posted a terrific increase of 50%. The strong recent performance means it was also able to grow revenue by 44% in total over the last three years. Accordingly, shareholders would have definitely welcomed those medium-term rates of revenue growth.

Turning to the outlook, the next year should generate growth of 79% as estimated by the six analysts watching the company. That's shaping up to be materially higher than the 9.8% growth forecast for the broader industry.

With this information, we can see why Applied Optoelectronics is trading at such a high P/S compared to the industry. It seems most investors are expecting this strong future growth and are willing to pay more for the stock.

The Key Takeaway

Applied Optoelectronics' P/S has grown nicely over the last month thanks to a handy boost in the share price. Using the price-to-sales ratio alone to determine if you should sell your stock isn't sensible, however it can be a practical guide to the company's future prospects.

As we suspected, our examination of Applied Optoelectronics' analyst forecasts revealed that its superior revenue outlook is contributing to its high P/S. At this stage investors feel the potential for a deterioration in revenues is quite remote, justifying the elevated P/S ratio. Unless these conditions change, they will continue to provide strong support to the share price.

Plus, you should also learn about these 3 warning signs we've spotted with Applied Optoelectronics (including 1 which is a bit unpleasant).

If companies with solid past earnings growth is up your alley, you may wish to see this free collection of other companies with strong earnings growth and low P/E ratios.

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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.