1 Under-the-Radar Small Cap Set To Pop?

Applied Optoelectronics (NASDAQ: AAOI) isn’t well known and why would it be trading at less than a half a billion dollars in valuation. But it has seen a surge recently in insider buying as those in-the-know seem to be betting on future prospects.

This small-cap company has positioned itself as a critical supplier to major data center operators and telecommunications firms, making it an intriguing investment opportunity.

If you’re wondering what exactly it does, AAOI designs and manufactures advanced optical devices, including lasers, integrated modules, and sub-assemblies for various applications in data centers, telecommunications, and cable television (CATV).

One competitive edge it enjoys is that it’s got a vertically integrated manufacturing process allows for better control over production costs and quality.

So why is AAOI an interesting play now?

Key Points

• Applied Optoelectronics shows strong technical indicators: a Golden Cross, rising RSI, and a bullish MACD crossover.
• AAOI reported data center year-over-year revenue growth of 42%, strong profit margins, and a healthy balance sheet.
• Insider buying activity signals confidence in future prospects.

Technically Bullish

From a chart perspective, AAOI’s recent stock performance has shown a bullish crossover between its 50-day and 200-day moving averages, indicating a potential uptrend.

The 50-day moving average has moved above the 200-day moving average, a technical pattern often referred to as the “Golden Cross,” which is typically a strong bullish signal.

It has been trending upward from an oversold position with the RSI below 30 to above 60 in recent weeks. This upward trend suggests increasing buying momentum without yet reaching overbought conditions, indicating further potential for price appreciation.

And a breakout seems to be occurring above a key resistance level.

So too the MACD line has recently crossed above the signal line, another bullish indicator. This crossover, combined with increasing histogram bars, supports the case for a continued uptrend in AAOI’s stock price.

And technically bullish signals accompany fundamental strength too.

Data Center Revenue Growth Surprises To Upside

Management reported a significant year-over-year data center revenue growth of 42% in its most recent quarterly earnings report based on higher demand for high-speed optical transceivers used in data centers, as well as strong sales in the telecommunications sector.

All that demand is translating not only to the top line but the bottom line may stand to benefit soon too because the company’s gross margin stands at 27.1%, up from the mid-teens in 2021 and 2022.

Notably, these margins are expected to improve further as AAOI scales its operations and continues to benefit from its vertically integrated manufacturing model. If there were a drawback it would be the concerning cash levels of just $8 million and negative free cash flow.

On a bright note, insider buying activity has been notable, with several key executives purchasing shares on the open market.

What Does the Future Look Like for AAOI?

The demand for data center infrastructure is expected to continue growing at a rapid pace, driven by the increasing adoption of artificial intelligence, cloud services, IoT, and big data analytics. The company’s high-speed optical transceivers are key components in data center networks, so the company stands to benefit from this ongoing trend.

The global rollout of 5G networks presents another significant growth opportunity for AAOI. The company’s optical components are integral to the high-speed, low-latency requirements of 5G infrastructure, and AAOI is well-positioned to capitalize on this market expansion.

The Bottom Line

Applied Optoelectronics offers an intriguing investment opportunity based on strong technical indicators as well as fundamentals in addition to favorable market conditions.

Combine brighter financial prospects with insider confidence and you end up with significant upside potential over the next few months. Those looking for an under-the-radar stock with high growth potential might want to look carefully at AAOI for an interesting reward to risk ratio.