Applied Optoelectronics, Inc. (NASDAQ:AAOI) Stocks Pounded By 27% But Not Lagging Industry On Growth Or Pricing

Applied Optoelectronics, Inc. (NASDAQ:AAOI) shares have had a horrible month, losing 27% after a relatively good period beforehand. The drop over the last 30 days has capped off a tough year for shareholders, with the share price down 26% in that time.

Even after such a large drop in price, when almost half of the companies in the United States' Communications industry have price-to-sales ratios (or "P/S") below 2x, you may still consider Applied Optoelectronics as a stock probably not worth researching with its 3.4x 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 as high as it is.

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See our latest analysis for Applied Optoelectronics

What Does Applied Optoelectronics' Recent Performance Look Like?

With revenue growth that's superior to most other companies of late, Applied Optoelectronics has been doing relatively well. The P/S is probably high because investors think this strong revenue performance will continue. However, if this isn't the case, investors might get caught out paying too much for the stock.

Want the full picture on analyst estimates for the company? Then our free report on Applied Optoelectronics will help you uncover what's on the horizon.

Do Revenue Forecasts Match The High P/S Ratio?

The only time you'd be truly comfortable seeing a P/S as high as Applied Optoelectronics' is when the company's growth is on track to outshine the industry.

Taking a look back first, we see that the company grew revenue by an impressive 101% last year. Pleasingly, revenue has also lifted 96% in aggregate from three years ago, thanks to the last 12 months of growth. Therefore, it's fair to say the revenue growth recently has been superb for the company.

Turning to the outlook, the next year should generate growth of 61% as estimated by the six analysts watching the company. Meanwhile, the rest of the industry is forecast to only expand by 14%, which is noticeably less attractive.

With this in mind, it's not hard to understand why Applied Optoelectronics' P/S is high relative to its industry peers. It seems most investors are expecting this strong future growth and are willing to pay more for the stock.

What We Can Learn From Applied Optoelectronics' P/S?

Despite the recent share price weakness, Applied Optoelectronics' P/S remains higher than most other companies in the industry. 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. 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.

It's always necessary to consider the ever-present spectre of investment risk. We've identified 2 warning signs with Applied Optoelectronics (at least 1 which is significant), and understanding them should be part of your investment process.

If you're unsure about the strength of Applied Optoelectronics' business, why not explore our interactive list of stocks with solid business fundamentals for some other companies you may have missed.

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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.