Applied Optoelectronics, Inc. (NASDAQ:AAOI) Stocks Pounded By 35% But Not Lagging Industry On Growth Or Pricing

The Applied Optoelectronics, Inc. (NASDAQ:AAOI) share price has softened a substantial 35% over the previous 30 days, handing back much of the gains the stock has made lately. Looking at the bigger picture, even after this poor month the stock is up 54% in the last year.

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 1.3x, you may still consider Applied Optoelectronics as a stock not worth researching with its 5.8x P/S ratio. However, the P/S might be quite high for a reason and it requires further investigation to determine if it's justified.

See our latest analysis for Applied Optoelectronics

What Does Applied Optoelectronics' Recent Performance Look Like?

Applied Optoelectronics hasn't been tracking well recently as its declining revenue compares poorly to other companies, which have seen some growth in their revenues on average. Perhaps the market is expecting the poor revenue to reverse, justifying it's current high P/S.. However, if this isn't the case, investors might get caught out paying too much for the stock.

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.

Is There Enough Revenue Growth Forecasted For Applied Optoelectronics?

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

Retrospectively, the last year delivered a frustrating 4.2% decrease to the company's top line. This has erased any of its gains during the last three years, with practically no change in revenue being achieved in total. Therefore, it's fair to say that revenue growth has been inconsistent recently for the company.

Shifting to the future, estimates from the four analysts covering the company suggest revenue should grow by 124% over the next year. With the industry only predicted to deliver 11%, the company is positioned for a stronger revenue result.

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

A significant share price dive has done very little to deflate Applied Optoelectronics' very lofty P/S. Typically, we'd caution against reading too much into price-to-sales ratios when settling on investment decisions, though it can reveal plenty about what other market participants think about the company.

Our look into Applied Optoelectronics shows that its P/S ratio remains high on the merit of its strong future revenues. It appears that shareholders are confident in the company's future revenues, which is propping up the P/S. Unless the analysts have really missed the mark, these strong revenue forecasts should keep the share price buoyant.

It is also worth noting that we have found 3 warning signs for Applied Optoelectronics (2 are a bit concerning!) that you need to take into consideration.

It's important to make sure you look for a great company, not just the first idea you come across. So if growing profitability aligns with your idea of a great company, take a peek at this free list of interesting companies with strong recent earnings growth (and a low P/E).

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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.