Applied’s chief financial officer, Stefan J. Murry, was recently interviewed and covered a lot of ground important to AAOI investors. There are many important messages I would like to highlight.
AAOI’s primary manufacturing facility is in Houston, where Hurricane Harvey recently hit. Stefan said everything was fine in Sugarland.
I’m very confident the worst is over and there’s no danger to the factory.
Stefan went out of his way to emphasise AAOI’s cost leadership in manufacturing which positions them well now, but also into the future.
A lot of investors don’t appreciate how much the company excels at manufacturing… What matters is that we’ve been able to make those products in quantity at an attractive cost.
The optical technology is important, but so is the technology and processes underpinning the manufacturing processes.
Away from the technology, our business model has been very highly vertically integrated. We continue to extend that. Those factors are at least as important as our technology.
I would say that we generally think that we have a 20% to 25% lower cost compared to most of our competitors. What we have to do is offer the lowest cost relative to competitors… Our goal is to be the lowest-cost producer versus those able to produce in sufficient quantity to be relevant.
There have been recent concerns that AAOI is losing market share to competitors, however Stefan is very confident of their position.
We are in a very strong position with respect to 100G, as strong as, if not stronger than, at 40G. I don’t see us losing any share.
We feel confident that based on our discussions with the customers, and the technology direction they are heading, we have the right set of tools in technology and manufacturing to maintain technology and cost leadership
If anything, Stefan believes interest from key customers to purchase product from competitors (ie: Fabrinet) is more related to supply concerns.
The motivation of investigating these other business models mainly has to do with concern there might not be enough supply out there… Large data-center operators want the lowest cost product to meet their needs; that’s all they want.
Demand is strong, weighted towards supply concerns rather than any downturn in demand.
Some of the demand picture we are seeing is very robust from these guys. It’s not a crazy concern to worry over whether there might not be enough capacity in future
Stefan points out the end of Copper has arrived and the high volume of data required globally means optical is the only way to go, marking the beginning of a signficant expansion in demand.
The entire industry is more real, in a sense, than it was at the time of the last big fiber-optics boom, in the late ’90s and early Naughts
Fiber to the home is becoming a reality. Data centers need fiber to solve problems today, right now. Cable is fiber-ing their networks, they call it “fiber-deep.” You’ve passed the point — the way to think about this, for the data centers, is that they pushed copper as long as they could.
There is no reason we won’t be phenomenally successful in the next decade… If you take the long view, companies like AOI, with strong core competency in the technology of designing, and in manufacturing, are very well positioned for this paradigm shift in the way that information gets communicated.
AAOI is off over 40% from it’s highs earlier this year and looks to be bottoming out around the $58 mark. It represents significant value at this level as I expect to see a run up into earnings. I’ll be looking for a small beat in this quarter’s forecasts and strong demand forecast for the next quarter due to strong 100G demand.