Intrinsic value of Applied Optoelectronics - AAOI

Previous Close

$27.51

  Intrinsic Value

$2.85

stock screener

  Rating & Target

str. sell

-90%

Previous close

$27.51

 
Intrinsic value

$2.85

 
Up/down potential

-90%

 
Rating

str. sell

We calculate the intrinsic value of AAOI stock by summing up the current values of future distributable cash flows generated by the company and dividing the sum by the number of outstanding shares. As such, the intrinsic value calculation depends entirely on projections. The more accurate your projections of the company's performance are - the more reliable is the intrinsic value calculation result. Please make sure to check the stock valuation input data below and adjust it if necessary. The quality of the output (intrinsic valuation result) is only as good as the quality of the input. See also DISCLAIMERS.

STOCK VALUATION INPUT DATA

Initial revenue growth rate, %
Terminal revenue growth rate, %
Revenue decline factor
Initial discount rate, %
Discount rate multiplier
Shares outstanding, mln

 

FINANCIAL STATEMENTS FORECAST and PRESENT VALUE CALCULATION

Fiscal year
2016(a)
   2017
   2018
   2019
   2020
   2021
   2022
   2023
   2024
   2025
   2026
   2027
   2028
   2029
   2030
   2031
   2032
   2033
   2034
   2035
   2036
   2037
   2038
   2039
   2040
   2041
   2042
   2043
   2044
   2045
   2046

INCOME STATEMENT

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Revenue growth rate, %
  37.37
  27.10
  24.89
  22.90
  21.11
  19.50
  18.05
  16.74
  15.57
  14.51
  13.56
  12.71
  11.94
  11.24
  10.62
  10.06
  9.55
  9.10
  8.69
  8.32
  7.99
  7.69
  7.42
  7.18
  6.96
  6.76
  6.59
  6.43
  6.29
  6.16
  6.04
Revenue, $m
  261
  332
  414
  509
  617
  737
  870
  1,016
  1,174
  1,344
  1,526
  1,720
  1,926
  2,142
  2,370
  2,608
  2,857
  3,117
  3,387
  3,669
  3,962
  4,267
  4,583
  4,912
  5,254
  5,609
  5,979
  6,363
  6,763
  7,179
  7,613
Variable operating expenses, $m
 
  290
  362
  445
  539
  644
  760
  888
  1,026
  1,175
  1,334
  1,504
  1,683
  1,872
  2,071
  2,279
  2,497
  2,724
  2,961
  3,207
  3,463
  3,729
  4,006
  4,293
  4,592
  4,902
  5,225
  5,561
  5,911
  6,275
  6,654
Fixed operating expenses, $m
 
  10
  11
  11
  11
  11
  12
  12
  12
  12
  13
  13
  13
  14
  14
  14
  15
  15
  16
  16
  16
  17
  17
  18
  18
  19
  19
  19
  20
  20
  21
Total operating expenses, $m
  238
  300
  373
  456
  550
  655
  772
  900
  1,038
  1,187
  1,347
  1,517
  1,696
  1,886
  2,085
  2,293
  2,512
  2,739
  2,977
  3,223
  3,479
  3,746
  4,023
  4,311
  4,610
  4,921
  5,244
  5,580
  5,931
  6,295
  6,675
Operating income, $m
  23
  32
  42
  53
  67
  82
  98
  116
  136
  157
  180
  204
  229
  256
  284
  314
  345
  377
  411
  446
  483
  521
  560
  601
  644
  688
  734
  782
  832
  884
  938
EBITDA, $m
  37
  49
  64
  81
  100
  121
  145
  171
  199
  229
  262
  296
  333
  371
  412
  454
  499
  545
  594
  644
  696
  750
  807
  866
  927
  990
  1,056
  1,125
  1,196
  1,271
  1,348
Interest expense (income), $m
  2
  1
  2
  3
  4
  6
  7
  9
  10
  12
  14
  16
  19
  21
  24
  27
  29
  32
  36
  39
  42
  46
  49
  53
  57
  61
  65
  70
  74
  79
  84
Earnings before tax, $m
  21
  30
  40
  50
  62
  76
  91
  108
  125
  145
  165
  187
  210
  235
  261
  288
  316
  345
  376
  408
  441
  475
  511
  548
  587
  627
  669
  712
  758
  805
  854
Tax expense, $m
  -10
  8
  11
  14
  17
  21
  25
  29
  34
  39
  45
  51
  57
  63
  70
  78
  85
  93
  101
  110
  119
  128
  138
  148
  158
  169
  181
  192
  205
  217
  231
Net income, $m
  31
  22
  29
  37
  46
  55
  66
  78
  92
  106
  121
  137
  154
  171
  190
  210
  230
  252
  274
  298
  322
  347
  373
  400
  428
  458
  488
  520
  553
  588
  623

BALANCE SHEET

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Cash and short-term investments, $m
  50
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
Total assets, $m
  322
  346
  432
  530
  642
  768
  906
  1,058
  1,223
  1,400
  1,590
  1,792
  2,006
  2,231
  2,468
  2,716
  2,976
  3,247
  3,529
  3,822
  4,127
  4,444
  4,774
  5,117
  5,473
  5,843
  6,228
  6,628
  7,045
  7,478
  7,930
Adjusted assets (=assets-cash), $m
  272
  346
  432
  530
  642
  768
  906
  1,058
  1,223
  1,400
  1,590
  1,792
  2,006
  2,231
  2,468
  2,716
  2,976
  3,247
  3,529
  3,822
  4,127
  4,444
  4,774
  5,117
  5,473
  5,843
  6,228
  6,628
  7,045
  7,478
  7,930
Revenue / Adjusted assets
  0.960
  0.960
  0.958
  0.960
  0.961
  0.960
  0.960
  0.960
  0.960
  0.960
  0.960
  0.960
  0.960
  0.960
  0.960
  0.960
  0.960
  0.960
  0.960
  0.960
  0.960
  0.960
  0.960
  0.960
  0.960
  0.960
  0.960
  0.960
  0.960
  0.960
  0.960
Average production assets, $m
  132
  168
  210
  258
  312
  373
  440
  514
  594
  680
  772
  870
  974
  1,084
  1,199
  1,320
  1,446
  1,577
  1,714
  1,857
  2,005
  2,159
  2,319
  2,486
  2,658
  2,838
  3,025
  3,220
  3,422
  3,633
  3,852
Working capital, $m
  98
  71
  89
  109
  133
  158
  187
  218
  252
  289
  328
  370
  414
  461
  509
  561
  614
  670
  728
  789
  852
  917
  985
  1,056
  1,130
  1,206
  1,285
  1,368
  1,454
  1,544
  1,637
Total debt, $m
  43
  59
  86
  118
  154
  194
  238
  287
  339
  396
  457
  521
  590
  662
  738
  817
  900
  987
  1,077
  1,171
  1,269
  1,370
  1,476
  1,585
  1,699
  1,818
  1,941
  2,069
  2,202
  2,341
  2,486
Total liabilities, $m
  95
  111
  138
  170
  206
  246
  290
  339
  391
  448
  509
  573
  642
  714
  790
  869
  952
  1,039
  1,129
  1,223
  1,321
  1,422
  1,528
  1,637
  1,751
  1,870
  1,993
  2,121
  2,254
  2,393
  2,538
Total equity, $m
  227
  235
  293
  361
  437
  522
  616
  719
  831
  952
  1,081
  1,219
  1,364
  1,517
  1,678
  1,847
  2,024
  2,208
  2,399
  2,599
  2,807
  3,022
  3,246
  3,479
  3,722
  3,973
  4,235
  4,507
  4,790
  5,085
  5,393
Total liabilities and equity, $m
  322
  346
  431
  531
  643
  768
  906
  1,058
  1,222
  1,400
  1,590
  1,792
  2,006
  2,231
  2,468
  2,716
  2,976
  3,247
  3,528
  3,822
  4,128
  4,444
  4,774
  5,116
  5,473
  5,843
  6,228
  6,628
  7,044
  7,478
  7,931
Debt-to-equity ratio
  0.189
  0.250
  0.290
  0.330
  0.350
  0.370
  0.390
  0.400
  0.410
  0.420
  0.420
  0.430
  0.430
  0.440
  0.440
  0.440
  0.440
  0.450
  0.450
  0.450
  0.450
  0.450
  0.450
  0.460
  0.460
  0.460
  0.460
  0.460
  0.460
  0.460
  0.460
Adjusted equity ratio
  0.651
  0.680
  0.680
  0.680
  0.680
  0.680
  0.680
  0.680
  0.680
  0.680
  0.680
  0.680
  0.680
  0.680
  0.680
  0.680
  0.680
  0.680
  0.680
  0.680
  0.680
  0.680
  0.680
  0.680
  0.680
  0.680
  0.680
  0.680
  0.680
  0.680
  0.680

CASH FLOW

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Net income, $m
  31
  22
  29
  37
  46
  55
  66
  78
  92
  106
  121
  137
  154
  171
  190
  210
  230
  252
  274
  298
  322
  347
  373
  400
  428
  458
  488
  520
  553
  588
  623
Depreciation, amort., depletion, $m
  14
  18
  22
  27
  33
  40
  47
  55
  63
  72
  82
  93
  104
  115
  128
  140
  154
  168
  182
  198
  213
  230
  247
  264
  283
  302
  322
  343
  364
  386
  410
Funds from operations, $m
  73
  40
  51
  64
  79
  95
  113
  133
  155
  178
  203
  229
  257
  287
  318
  350
  384
  420
  457
  495
  535
  577
  620
  665
  711
  760
  810
  863
  917
  974
  1,033
Change in working capital, $m
  16
  15
  18
  20
  23
  26
  29
  31
  34
  37
  39
  42
  44
  47
  49
  51
  54
  56
  58
  61
  63
  65
  68
  71
  73
  76
  79
  83
  86
  90
  93
Cash from operations, $m
  57
  25
  33
  44
  56
  69
  85
  102
  121
  141
  164
  188
  213
  240
  269
  299
  331
  364
  398
  434
  472
  511
  552
  594
  638
  683
  731
  780
  831
  884
  940
Maintenance CAPEX, $m
  0
  -14
  -18
  -22
  -27
  -33
  -40
  -47
  -55
  -63
  -72
  -82
  -93
  -104
  -115
  -128
  -140
  -154
  -168
  -182
  -198
  -213
  -230
  -247
  -264
  -283
  -302
  -322
  -343
  -364
  -386
New CAPEX, $m
  -50
  -36
  -42
  -48
  -54
  -61
  -67
  -74
  -80
  -86
  -92
  -98
  -104
  -110
  -115
  -121
  -126
  -131
  -137
  -143
  -148
  -154
  -160
  -166
  -173
  -180
  -187
  -194
  -202
  -211
  -219
Cash from investing activities, $m
  -42
  -50
  -60
  -70
  -81
  -94
  -107
  -121
  -135
  -149
  -164
  -180
  -197
  -214
  -230
  -249
  -266
  -285
  -305
  -325
  -346
  -367
  -390
  -413
  -437
  -463
  -489
  -516
  -545
  -575
  -605
Free cash flow, $m
  15
  -25
  -26
  -27
  -26
  -25
  -22
  -19
  -14
  -8
  -1
  7
  17
  27
  38
  51
  64
  79
  94
  110
  126
  144
  162
  181
  200
  221
  242
  264
  286
  310
  334
Issuance/(repayment) of debt, $m
  -26
  24
  28
  32
  36
  40
  44
  49
  53
  57
  61
  65
  68
  72
  76
  79
  83
  87
  90
  94
  98
  102
  106
  110
  114
  118
  123
  128
  133
  139
  145
Issuance/(repurchase) of shares, $m
  28
  28
  30
  30
  31
  30
  28
  25
  20
  15
  8
  1
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
Cash from financing (excl. dividends), $m  
  5
  52
  58
  62
  67
  70
  72
  74
  73
  72
  69
  66
  68
  72
  76
  79
  83
  87
  90
  94
  98
  102
  106
  110
  114
  118
  123
  128
  133
  139
  145
Total cash flow (excl. dividends), $m
  22
  26
  31
  36
  40
  45
  50
  55
  59
  64
  68
  73
  85
  99
  114
  130
  147
  165
  184
  203
  224
  245
  267
  290
  314
  339
  365
  392
  420
  449
  479
Retained Cash Flow (-), $m
  -62
  -50
  -58
  -67
  -76
  -85
  -94
  -103
  -112
  -121
  -129
  -137
  -145
  -153
  -161
  -169
  -176
  -184
  -192
  -200
  -208
  -216
  -224
  -233
  -242
  -252
  -262
  -272
  -283
  -295
  -307
Prev. year cash balance distribution, $m
 
  42
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
Cash flow adjustment, $m
 
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
Cash available for distribution, $m
 
  18
  -28
  -32
  -36
  -40
  -44
  -49
  -53
  -57
  -61
  -65
  -60
  -54
  -47
  -38
  -29
  -19
  -8
  4
  16
  29
  43
  57
  72
  87
  103
  120
  136
  154
  171
Discount rate, %
 
  4.30
  4.52
  4.74
  4.98
  5.23
  5.49
  5.76
  6.05
  6.35
  6.67
  7.00
  7.35
  7.72
  8.11
  8.51
  8.94
  9.39
  9.86
  10.35
  10.87
  11.41
  11.98
  12.58
  13.21
  13.87
  14.56
  15.29
  16.05
  16.86
  17.70
PV of cash for distribution, $m
 
  18
  -25
  -28
  -30
  -31
  -32
  -33
  -33
  -33
  -32
  -31
  -26
  -21
  -16
  -11
  -7
  -4
  -1
  1
  2
  3
  4
  4
  4
  3
  3
  3
  2
  2
  1
Current shareholders' claim on cash, %
  100
  94.1
  89.5
  85.8
  82.9
  80.6
  78.8
  77.6
  76.7
  76.1
  75.8
  75.8
  75.8
  75.8
  75.8
  75.8
  75.8
  75.8
  75.8
  75.8
  75.8
  75.8
  75.8
  75.8
  75.8
  75.8
  75.8
  75.8
  75.8
  75.8
  75.8

Applied Optoelectronics, Inc. is a vertically integrated provider of fiber-optic networking products, primarily for networking end markets, such as Internet data center, cable television (CATV), fiber-to-the-home (FTTH) and telecommunications (telecom). The Company designs and manufactures a range of optical communications products at varying levels of integration, from components, subassemblies and modules to turnkey equipment. To Internet-based data center operators, it supplies optical transceivers that plug into switches and servers within the data center and allow these network devices to send and receive data over fiber optic cables. The Company supplies a range of products, including lasers, transmitters and transceivers, and turnkey equipment, to the CATV market. The Company designs, manufactures and integrates its own analog and digital lasers using a combination of Metal Organic Chemical Vapor Deposition (MOCVD) and its Molecular Beam Epitaxy (MBE) fabrication process.

FINANCIAL RATIOS  of  Applied Optoelectronics (AAOI)

Valuation Ratios
P/E Ratio 16.3
Price to Sales 1.9
Price to Book 2.2
Price to Tangible Book
Price to Cash Flow 8.9
Price to Free Cash Flow 72.3
Growth Rates
Sales Growth Rate 37.4%
Sales - 3 Yr. Growth Rate %
EPS Growth Rate %
EPS - 3 Yr. Growth Rate %
Capital Spending Gr. Rate -13.8%
Cap. Spend. - 3 Yr. Gr. Rate 38%
Financial Strength
Quick Ratio 6
Current Ratio 0
LT Debt to Equity 15.4%
Total Debt to Equity 18.9%
Interest Coverage 12
Management Effectiveness
Return On Assets 11.4%
Ret/ On Assets - 3 Yr. Avg. 6.5%
Return On Total Capital 12.3%
Ret/ On T. Cap. - 3 Yr. Avg. 7.2%
Return On Equity 15.8%
Return On Equity - 3 Yr. Avg. 9.4%
Asset Turnover 0.9
Profitability Ratios
Gross Margin 33.3%
Gross Margin - 3 Yr. Avg. 32.9%
EBITDA Margin 14.2%
EBITDA Margin - 3 Yr. Avg. 11%
Operating Margin 8.8%
Oper. Margin - 3 Yr. Avg. 6.7%
Pre-Tax Margin 8%
Pre-Tax Margin - 3 Yr. Avg. 5.6%
Net Profit Margin 11.9%
Net Profit Margin - 3 Yr. Avg. 6.9%
Effective Tax Rate -47.6%
Eff/ Tax Rate - 3 Yr. Avg. -15.9%
Payout Ratio 0%

AAOI stock valuation input parameters

Revenue. Company's revenue (or sales) is always the starting point of any cash flow forecast. In the AAOI stock intrinsic value calculation we used $261 million for the last fiscal year's total revenue generated by Applied Optoelectronics. The default revenue input number comes from 2016 income statement of Applied Optoelectronics. You may change it if you feel that it should be adjusted for some unusual circumstances that are not expected to be repeated in the future or if you already know (from interim financial statements, for example) that this year's revenue is going to be quite different.

Revenue growth rate. Forecasted future revenue growth rate is the most important input parameter for the intrinsic value calculation. Unlike other input parameters that are reasonably expected to be in line with their historic averages or their historic trends, the revenue growth rate by and large is a wild card: nobody really knows what the company's revenue will be in the future. Of course, the level of unpredictability is different for different industries (utility companies being the most predictable and, thus, less risky).
    We use three input parameters to forecast the revenue growth rate in our AAOI stock valuation model: a) initial revenue growth rate of 27.1% whose default value is the revenue growth rate in the most recent quarter compared to the quarterly revenue a year ago; b) terminal revenue growth rate of 5% whose default value is chosen to be close to the average nominal (i.e. not adjusted for inflation) GDP growth rate; and c) revenue decline factor of 0.9, which stipulates that revenue growth rate in each forecasted year will be equal to the difference of the revenue growth rate in the preceding year and the terminal revenue growth rate multiplied by this revenue decline factor (with the passage of time the revenue growth rate will be approaching the terminal revenue growth rate, but not quite reaching it - though the difference could be infinitesimally small).
    At the revenue decline factor of 1, the future revenue growth rate is forecasted to be constant and equal to the initial revenue growth rate. The smaller the revenue decline factor, the faster the revenue growth rate will approach the terminal revenue growth.

Discount rate. The discount rate is used for determining the present value of future cash flows: future cash flows are "discounted" as at normal conditions (that translate into positive expected return on investment) one dollar today is worth more than the same dollar in the future. Unlike all other valuation models, we use variable discount rate, i.e. it increases for each consecutive year. This is done to account for higher risk of cash flows coming in further in the future.
    The initial discount rate of 4.3%, whose default value for AAOI is calculated based on our internal credit rating of Applied Optoelectronics, is applied to the cash flow expected to be received a year from now (well, actually, to be precise, in the financial year following the base year - the last year for which we have financial statements). For each consecutive year the discount rate is multiplied by the discount rate multiplier of 1.05, e.i. each year it increases by 5%. Feel free to change this number to correspond to your level of risk assessment of Applied Optoelectronics.
    By the way, it is easy to set the discount rate to be constant (this would make comparison with other valuation models easier): just set the discount rate multiplier equal to 1 and chose the magnitude of the initial discount rate to your liking.

Variable cost ratio is the ratio of variable costs (i.e. costs that fluctuate with fluctuation of the volume of production) to the revenue expressed as a percentage. In the calculation of intrinsic value of AAOI stock the variable cost ratio is equal to 87.4%.

Fixed operating expenses is just that - expenses that are not dependant on the volume of production. They are set to $10 million in the base year in the intrinsic value calculation for AAOI stock. These expenses increase with the level of inflation in subsequent years.

Interest rate on debt is the average all-in rate of interest paid by the company on its debt. It is set at 3.6% for Applied Optoelectronics.

Corporate tax rate of 27% is the nominal tax rate for Applied Optoelectronics. In reality, companies find ways to pay much less taxes than that or not to pay them at all.

Cash flow adjustment could be used for any adjustment the investor deems necessary. Most commonly we use this field to account for stock options-related effects in excess of what is reported on the company's income statement. The cash flow adjustment is expressed as a percentage of the revenue, and in the current valuation of the AAOI stock is equal to 0%.

Production assets are the company's assets used for manufacturing products or provision of services. In the valuation model input table they are expressed as a percentage of revenue and for AAOI are equal to 50.6%.

Life of production assets of 9.4 years is the average useful life of capital assets used in Applied Optoelectronics operations. It is used to calculate yearly capital expenditures needed to keep these assets in good order - we call it the maintenance CAPEX.

Working capital is the difference between the company's current assets and liabilities. In the model we use the ratio of working capital to revenue, which for AAOI is equal to 21.5%. A negative number means that the company is apt at using financial resources of its suppliers and customers; a large positive number, on the other hand, means that it either provides in-kind financing to others or is not good at managing its inventories.

Book value of equity - $227 million for Applied Optoelectronics - is used in calculation of the "floor" for intrinsic valuation based on the discounted cash flow (DCF) method. Even if the prospects are very bad for a company, its assets could always be sold now for their current fair market value.

Shares outstanding of 19.915 million for Applied Optoelectronics is needed to calculate the intrinsic value of one share.

Market capitalization is used here only for reference purposes and as a quick check that the share price and the number of shares outstanding numbers are correct - something especially to be cognizant about at stock splits. So, the market capitalization of Applied Optoelectronics at the current share price and the inputted number of shares is $0.5 billion.

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COMPANY NEWS

▶ Applied Optoelectronics posts 4Q profit   [Feb-21-18 06:27PM  Associated Press]
▶ GoPro, Kodak Capture Short Sellers' Attention   [Jan-16-18 02:04PM  Benzinga]
▶ Here's Why Optical Networking Stocks Fell in December   [Jan-02-18 06:00PM  Motley Fool]
▶ No, Snap is not a 'buy' right now   [11:01AM  Yahoo Finance Video]
▶ Applied Optoelectronics posts 3Q profit   [04:57PM  Associated Press]
▶ Is This Optical Firm's Stock Bottoming Out? Outlook Surprises   [04:25PM  Investor's Business Daily]
▶ More Bad Optics: Best of Kass   [01:00AM  TheStreet.com]
▶ Optical Stocks Shredded On Oclaro's China, Data Center Weakness   [Nov-02-17 05:34PM  Investor's Business Daily]
▶ Company News For Oct 16, 2017   [10:11AM  Zacks]
▶ Applied Opto CFO: Other Vendors May Be Hurt Too   [Oct-12-17 05:56PM  Barrons.com]
Financial statements of AAOI
Valuation of Stocks

The paper VALUATION OF STOCKS: The Quest for Intrinsic Value provides a detailed description of our valuation model and discloses the calculation algorithm.

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