With A 28% Price Drop For Applied Optoelectronics, Inc. (NASDAQ:AAOI) You'll Still Get What You Pay For

Applied Optoelectronics, Inc. (NASDAQ:AAOI) shares have retraced a considerable 28% in the last month, reversing a fair amount of their solid recent performance. Regardless, last month's decline is barely a blip on the stock's price chart as it has gained a monstrous 643% in the last year.

In spite of the heavy fall in price, given close to half the companies operating in the United States' Communications industry have price-to-sales ratios (or "P/S") below 1.2x, you may still consider Applied Optoelectronics as a stock to potentially avoid with its 2.7x P/S ratio. However, the P/S might be high for a reason and it requires further investigation to determine if it's justified.

Check out our latest analysis for Applied Optoelectronics

What Does Applied Optoelectronics' Recent Performance Look Like?

Recent times haven't been great for Applied Optoelectronics as its revenue has been rising slower than most other companies. One possibility is that the P/S ratio is high because investors think this lacklustre revenue performance will improve markedly. 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.

How Is Applied Optoelectronics' Revenue Growth Trending?

In order to justify its P/S ratio, Applied Optoelectronics would need to produce impressive growth in excess of the industry.

If we review the last year of revenue, the company posted a result that saw barely any deviation from a year ago. This isn't what shareholders were looking for as it means they've been left with a 5.3% decline in revenue over the last three years in total. Accordingly, shareholders would have felt downbeat about the medium-term rates of revenue growth.

Turning to the outlook, the next year should generate growth of 40% as estimated by the three analysts watching the company. With the industry only predicted to deliver 0.6%, 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

There's still some elevation in Applied Optoelectronics' P/S, even if the same can't be said for its share price recently. 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.

As we suspected, our examination of Applied Optoelectronics' analyst forecasts revealed that its superior revenue outlook is contributing to its high P/S. 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.

Before you take the next step, you should know about the 2 warning signs for Applied Optoelectronics that we have uncovered.

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.