Won a $300 million large order from Microsoft, and the underrated Applied Optoelectronics (AAOI. US) is the next "10 baggers"?

Won a $300 million large order from Microsoft, and the underrated Applied Optoelectronics (AAOI. US) is the next "10 baggers"? - Xunshi Optical Communication Network (iccsz.com)

Abstract: Earlier this year, the company signed two agreements with Microsoft, including the manufacture of next-generation optical module products (including 400G and beyond) for its data centers, and the company believes that the revenue of these products could exceed $300 million in the next few years

ICC News ChatGPT is in the ascendant of the AI boom, and a U.S.-listed company has applied Optoelectronics (AAOI. US) stock price is quietly "rising": as early as June this year, the company's stock price rebounded strongly from its lows, and since November, it has risen from around $7-8 to $13.33 (as of the close of trading on November 21), an increase of up to 80% in the month.

From a macro perspective, the rapid growth of the AI industry's demand for computing power has promoted the listed companies related to optical modules to deliver performance "answer sheets" that exceed expectations; From the perspective of the company, the company's performance has improved significantly due to the large orders, and it is expected to continue to maintain growth momentum in the future.

On the news side, the application optoelectronics once wanted to sell its Chinese assets and business, including its Chinese subsidiary Ningbo Global Radio and Television, to Yuhan Optoelectronics, a subsidiary of Shijia Photonics, but the SPA agreement signed by the two parties for the acquisition was terminated in September. Considering the difficulties in the operation of domestic and foreign capital markets, and the changes in the macro market and the AI industry this year, Applied Optoelectronics may plan to cooperate with ZTE and other partners to jointly expand the optical module business in the Chinese market. This move will undoubtedly contribute more increments to the company's future performance.

The AI boom is driving the demand for optical modules

The reason why the application of optoelectronics can be favored by market investors is mainly due to the double "bonus" of track and performance.

Applied Optoelectronics) specializes in the design and manufacture of a series of optical communication products, including data center optical modules and server optical connection products, covering high-speed optical communication technology, data center interconnection, cloud computing and 5G communications.

According to Zhitong Financial APP, optical communication is a communication method with light wave as the carrier, which has become the most mainstream information transmission method in the world, and the optical module is one of the basic units of the physical layer of the optical communication system, and the cost of optical module in the system equipment in the 5G optical communication system can account for 50%-70%.

With the advent of ChatGPT, the AI industry continues to be hot, and the demand for computing power continues to increase. Taking ChatGPT as an example, ChatGPT's total computing power consumption is about 3640PF-days (100 trillion calculations per second, 3640 days need to be calculated), and according to OpenAI, the new generation of GTP-5 will be released from the end of 2024 to 2025, with 100 times the number of parameters and 200-400 times the amount of computation required by GTP-3.

According to IDC's forecast, China's AI computing power will increase from 268 EFLOPS in 2022 to 2026 1271EFLOPS, with a compound annual growth rate (CAGR) of about 47.6%. In the context of the rapid growth of AI computing power, the rapid growth of the corresponding data transmission hardware demand has also become an inevitable trend.

In terms of product structure, optical modules can be divided into 100G optical modules, 200G optical modules, 400G optical modules, 800G optical modules, etc., according to different support rates, and the sending/receiving data rate of 400G optical modules is 400G/s.

For example, China Mobile plans to launch centralized procurement of 400G products by the end of 2023 to promote 400G into the commercial stage. China Unicom Zhejiang, China Unicom Group Research Institute, and Huawei jointly built the country's largest 400G in Zhejiang The OTN experimental network accelerates the maturity and commercialization of 400G.

According to Zhitong Financial APP, the current revenue of application optoelectronics is mainly based on 400G products, benefiting from Microsoft's data center orders, the total revenue of 400G products of Q2 company has doubled, accounting for 11% of the total revenue of data center business, and it is expected to continue to increase in the future.

For the new generation of 800G optical modules, a number of standardization organizations at home and abroad have successively carried out 800 For the standardization of Gbit/s, major suppliers such as Huawei, Zhongji InnoLight (300308.SZ), and Xinyisheng (300502.SZ) have 800G mass production capacity. Among them, Zhongji InnoLight has taken the lead in obtaining 800G batch orders from overseas customers such as NVIDIA and Google.

800G products are not only superior in bandwidth transmission rate, but also better than 400G in terms of availability and system cost, and can use 25.6Tbps chips in a 1U form factor, and 32 external chips 800Gbps port, the cost per bit will be better than the equivalent 400Gbps. According to Dell'Oro's forecast, the penetration rate of 800G optical modules is expected to be higher than that of 400G, and by 2025, it will exceed 25% in data center switch ports.

Previously, Ningbo Global Radio and Television, a Chinese subsidiary of Applied Optoelectronics, has jointly released the industry's first Thin Film Lithium based on lithium niobate (00763) with ZTE (00763). Niobate, TFLN) modulator scheme, compared with the silicon photonics scheme, it uses a lower loss TFLN modulator chip to achieve low power consumption, high performance, and low cost, and is expected to be used in the future to upgrade the capacity of data center equipment to meet the higher bandwidth requirements brought about by the surge in traffic such as cloud computing, VR/AR, AI, and 5G.

Earlier this year, the company signed two agreements with Microsoft, including the manufacture of next-generation optical module products (including 400G and above) for its data centers, and the company believes that the revenue of these products could exceed $300 million in the next few years; The company has also signed an additional development agreement with Microsoft for the source fiber optic cable (active optical cables, AOC) provides design and assembly services.

In terms of production R&D progress, the company is working hard to increase the production capacity of existing products, and plans to advance the shipment date from late December to November; For future product deployments, the company will deliver the first products related to the new agreement to Microsoft for testing. By the end of the year, the company expects to send samples of its 800G products to four data center customers for evaluation.

Q3 Initial EBITDA Positive Long-term performance certainty

In addition to the "east wind" brought by the popular track of optical modules, the application of optoelectronics is also inseparable from the company's own "excellent" performance.

Driven by the AI boom, the company's latest quarterly results exceeded market expectations: in the Q3 earnings report, the company reported positive EBITDA for the first time, indicating that the company's performance has reached an important milestone.

According to the company's recently announced Q3 financial report for 2022, the company achieved revenue of US$62.55 million in the third quarter, a year-on-year increase of 10.33%, and a net loss of about US$8.95 million, which was significantly narrower than the loss of US$15.63 million in the same period last year.

In addition, the company's gross profit margin also increased from 24.8% to 32.2% sequentially, exceeding the upper limit of the second quarter guidance of 31%.

Geographically, nearly one-third of the company's revenue comes from the United States (about $19.86 million), another about $37.19 million from Taiwan, and about $5.49 million from Chinese mainland.

In the third quarter, the rapid growth of the company's revenue was mainly due to the contribution of the data center business. As a world-renowned technology giant, Microsoft's every move can become the vane of the industry, and the application of optoelectronics can get Microsoft's large orders, which not only confirms the company's technical strength from the side, but also provides full support for the company's performance in the next period of time. On this basis, applied optoelectronics is expected to gain more high-end customers in the future.

Looking ahead, the company expects Q3 growth to continue into Q4 given continued strong demand, and is leading to positive earnings per share (EPS) for Q4.

According to Zhitong Financial APP, in terms of cable television (CATV) product business, the company recently launched the latest solution in Quantum's product line, QuantumLink, which can remotely manage cable broadband amplifiers, thereby reducing customer downtime. This innovative solution can be used as: Quantum18 The built-in functionality of the smart amplifier or as a module plug-in for an existing amplifier ensures scalable network management without compromising performance. According to Applied, many customers have shown particular interest in QuantumLink, and the company has established a strategic partnership with distributor digicom.

When it comes to wired internet at home, tens of millions of homes in the U.S. are currently connected using DOCSIS 4.0 technology, which can support up to 10 Gbps downlink speeds and up to 6 The uplink speed of Gbps is expected to grow rapidly in the next few years.

The company said that because there is no longer a middleman link in the new business model, the average selling price of the company's products will be higher, and in the fourth quarter of next year, the scale of the cable TV business may exceed 40 million US dollars, and the gross profit margin will reach about 40%, becoming a powerful supplement to the optical module business.

Summary

Behind the brilliant performance, the technical strength has been fully verified, and the subsequent growth of large customer orders is guaranteed, and the application of optoelectronics will fully benefit from the high prosperity of the industry.

Considering that the company's current market capitalization is less than $500 million, which is still in the undervalued range, the company is expected to continue to increase its business scale in the future, ushering in the "Davis double-click" of stock price and performance.