Intrinsic value of Applied Optoelectronics, Inc. - AAOI

Previous Close

$12.72

  Intrinsic Value

$3.10

stock screener

  Rating & Target

str. sell

-76%

Previous close

$12.72

 
Intrinsic value

$3.10

 
Up/down potential

-76%

 
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

Revenue (in 0001), $M
Initial revenue growth rate, %
Terminal revenue growth rate, %
Revenue decline factor
Initial discount rate, %
Discount rate multiplier
Variable cost ratio, %
Fixed operating expenses, $M
Interest rate on debt, %
Effective corporate tax rate, %
Production assets / Revenue, %
Life of production assets, yrs
Working capital / Revenue, %
Revenue / Adjusted assets
Adjusted equity ratio
Cash flow adjustment, % of Revenue
Book value of equity, $M
Shares outstanding, mln
Market capitalization, $bln 0.3

 

FINANCIAL STATEMENTS FORECAST and PRESENT VALUE CALCULATION

Fiscal year
   2
   3
   4
   5
   6
   7
   8
   9
   10
   11
   12
   13
   14
   15
   16
   17
   18
   19
   20
   21
   22
   23
   24
   25
   26
   27
   28
   29
   30
   31

INCOME STATEMENT

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Revenue growth rate, %
  2.00
  2.30
  2.57
  2.81
  3.03
  3.23
  3.41
  3.57
  3.71
  3.84
  3.95
  4.06
  4.15
  4.24
  4.31
  4.38
  4.44
  4.50
  4.55
  4.59
  4.64
  4.67
  4.70
  4.73
  4.76
  4.78
  4.81
  4.83
  4.84
  4.86
Revenue, $m
  272
  279
  286
  294
  303
  312
  323
  335
  347
  360
  375
  390
  406
  423
  441
  461
  481
  503
  526
  550
  575
  602
  631
  661
  692
  725
  760
  797
  835
  876
Variable operating expenses, $m
  41
  42
  42
  43
  43
  44
  45
  46
  46
  47
  25
  26
  27
  28
  29
  31
  32
  33
  35
  36
  38
  40
  42
  44
  46
  48
  50
  53
  55
  58
Fixed operating expenses, $m
  246
  252
  257
  263
  269
  275
  281
  287
  293
  300
  306
  313
  320
  327
  334
  341
  349
  357
  364
  372
  381
  389
  398
  406
  415
  424
  434
  443
  453
  463
Total operating expenses, $m
  287
  294
  299
  306
  312
  319
  326
  333
  339
  347
  331
  339
  347
  355
  363
  372
  381
  390
  399
  408
  419
  429
  440
  450
  461
  472
  484
  496
  508
  521
Operating income, $m
  -15
  -15
  -14
  -12
  -9
  -6
  -2
  2
  7
  13
  44
  51
  59
  68
  78
  89
  100
  113
  127
  141
  157
  173
  191
  210
  231
  253
  276
  301
  327
  355
EBITDA, $m
  38
  39
  41
  44
  47
  51
  56
  62
  69
  76
  85
  94
  104
  115
  127
  139
  153
  168
  184
  201
  220
  240
  261
  283
  307
  332
  359
  388
  418
  451
Interest expense (income), $m
  2
  5
  5
  5
  5
  5
  6
  6
  6
  7
  7
  7
  8
  8
  8
  9
  9
  10
  10
  11
  12
  12
  13
  14
  14
  15
  16
  17
  18
  19
  20
Earnings before tax, $m
  -20
  -20
  -19
  -17
  -15
  -12
  -8
  -4
  1
  7
  36
  43
  51
  60
  69
  80
  91
  103
  116
  130
  145
  161
  178
  196
  216
  237
  259
  283
  308
  335
Tax expense, $m
  0
  0
  0
  0
  0
  0
  0
  0
  0
  2
  10
  12
  14
  16
  19
  21
  24
  28
  31
  35
  39
  43
  48
  53
  58
  64
  70
  76
  83
  90
Net income, $m
  -20
  -20
  -19
  -17
  -15
  -12
  -8
  -4
  1
  5
  27
  32
  37
  44
  51
  58
  66
  75
  84
  95
  105
  117
  130
  143
  158
  173
  189
  207
  225
  245

BALANCE SHEET

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Cash and short-term investments, $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
Total assets, $m
  467
  478
  490
  504
  519
  536
  554
  574
  595
  618
  643
  669
  696
  726
  757
  790
  826
  863
  902
  943
  987
  1,033
  1,082
  1,133
  1,187
  1,244
  1,304
  1,367
  1,433
  1,502
Adjusted assets (=assets-cash), $m
  467
  478
  490
  504
  519
  536
  554
  574
  595
  618
  643
  669
  696
  726
  757
  790
  826
  863
  902
  943
  987
  1,033
  1,082
  1,133
  1,187
  1,244
  1,304
  1,367
  1,433
  1,502
Revenue / Adjusted assets
  0.582
  0.584
  0.584
  0.583
  0.584
  0.582
  0.583
  0.584
  0.583
  0.583
  0.583
  0.583
  0.583
  0.583
  0.583
  0.584
  0.582
  0.583
  0.583
  0.583
  0.583
  0.583
  0.583
  0.583
  0.583
  0.583
  0.583
  0.583
  0.583
  0.583
Average production assets, $m
  224
  229
  235
  242
  249
  257
  266
  275
  286
  297
  308
  321
  334
  348
  363
  379
  396
  414
  433
  453
  474
  496
  519
  544
  570
  597
  625
  656
  687
  721
Working capital, $m
  89
  91
  93
  96
  99
  102
  105
  109
  113
  117
  122
  127
  132
  138
  144
  150
  157
  164
  171
  179
  188
  196
  206
  215
  226
  236
  248
  260
  272
  286
Total debt, $m
  91
  94
  98
  102
  106
  111
  116
  121
  127
  134
  141
  148
  156
  164
  173
  183
  192
  203
  214
  226
  238
  251
  265
  279
  294
  310
  327
  345
  364
  383
Total liabilities, $m
  132
  135
  138
  142
  146
  151
  156
  162
  168
  174
  181
  189
  196
  205
  214
  223
  233
  243
  254
  266
  278
  291
  305
  320
  335
  351
  368
  385
  404
  424
Total equity, $m
  335
  343
  352
  362
  373
  385
  398
  412
  427
  444
  461
  480
  500
  521
  544
  568
  593
  619
  648
  677
  709
  742
  777
  814
  852
  893
  936
  981
  1,029
  1,079
Total liabilities and equity, $m
  467
  478
  490
  504
  519
  536
  554
  574
  595
  618
  642
  669
  696
  726
  758
  791
  826
  862
  902
  943
  987
  1,033
  1,082
  1,134
  1,187
  1,244
  1,304
  1,366
  1,433
  1,503
Debt-to-equity ratio
  0.270
  0.280
  0.280
  0.280
  0.280
  0.290
  0.290
  0.290
  0.300
  0.300
  0.310
  0.310
  0.310
  0.320
  0.320
  0.320
  0.320
  0.330
  0.330
  0.330
  0.340
  0.340
  0.340
  0.340
  0.350
  0.350
  0.350
  0.350
  0.350
  0.360
Adjusted equity ratio
  0.718
  0.718
  0.718
  0.718
  0.718
  0.718
  0.718
  0.718
  0.718
  0.718
  0.718
  0.718
  0.718
  0.718
  0.718
  0.718
  0.718
  0.718
  0.718
  0.718
  0.718
  0.718
  0.718
  0.718
  0.718
  0.718
  0.718
  0.718
  0.718
  0.718

CASH FLOW

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Net income, $m
  -20
  -20
  -19
  -17
  -15
  -12
  -8
  -4
  1
  5
  27
  32
  37
  44
  51
  58
  66
  75
  84
  95
  105
  117
  130
  143
  158
  173
  189
  207
  225
  245
Depreciation, amort., depletion, $m
  53
  54
  55
  56
  57
  58
  59
  60
  61
  63
  41
  43
  45
  46
  48
  51
  53
  55
  58
  60
  63
  66
  69
  72
  76
  80
  83
  87
  92
  96
Funds from operations, $m
  33
  34
  36
  38
  42
  46
  51
  56
  62
  68
  68
  74
  82
  90
  99
  109
  119
  130
  142
  155
  169
  183
  199
  216
  233
  252
  273
  294
  317
  341
Change in working capital, $m
  2
  2
  2
  3
  3
  3
  3
  4
  4
  4
  5
  5
  5
  6
  6
  6
  7
  7
  7
  8
  8
  9
  9
  10
  10
  11
  11
  12
  13
  13
Cash from operations, $m
  31
  32
  33
  36
  39
  43
  47
  52
  58
  63
  63
  70
  77
  85
  93
  102
  112
  123
  135
  147
  160
  175
  190
  206
  223
  242
  261
  282
  304
  328
Maintenance CAPEX, $m
  -29
  -30
  -31
  -31
  -32
  -33
  -34
  -35
  -37
  -38
  -40
  -41
  -43
  -45
  -46
  -48
  -51
  -53
  -55
  -58
  -60
  -63
  -66
  -69
  -72
  -76
  -80
  -83
  -87
  -92
New CAPEX, $m
  -4
  -5
  -6
  -7
  -7
  -8
  -9
  -9
  -10
  -11
  -12
  -13
  -13
  -14
  -15
  -16
  -17
  -18
  -19
  -20
  -21
  -22
  -23
  -25
  -26
  -27
  -29
  -30
  -32
  -33
Cash from investing activities, $m
  -33
  -35
  -37
  -38
  -39
  -41
  -43
  -44
  -47
  -49
  -52
  -54
  -56
  -59
  -61
  -64
  -68
  -71
  -74
  -78
  -81
  -85
  -89
  -94
  -98
  -103
  -109
  -113
  -119
  -125
Free cash flow, $m
  -2
  -3
  -3
  -2
  -1
  1
  4
  7
  11
  14
  12
  16
  21
  26
  32
  38
  45
  52
  61
  69
  79
  89
  100
  112
  125
  138
  153
  168
  185
  202
Issuance/(repayment) of debt, $m
  3
  3
  3
  4
  4
  5
  5
  6
  6
  6
  7
  7
  8
  8
  9
  9
  10
  10
  11
  12
  12
  13
  14
  14
  15
  16
  17
  18
  19
  20
Issuance/(repurchase) of shares, $m
  27
  28
  28
  27
  26
  24
  21
  18
  15
  12
  0
  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  
  30
  31
  31
  31
  30
  29
  26
  24
  21
  18
  7
  7
  8
  8
  9
  9
  10
  10
  11
  12
  12
  13
  14
  14
  15
  16
  17
  18
  19
  20
Total cash flow (excl. dividends), $m
  27
  28
  28
  29
  29
  30
  31
  31
  32
  32
  19
  23
  28
  34
  40
  47
  55
  63
  72
  81
  91
  102
  114
  127
  140
  154
  170
  186
  204
  222
Retained Cash Flow (-), $m
  -27
  -28
  -28
  -27
  -26
  -24
  -21
  -18
  -15
  -16
  -18
  -19
  -20
  -21
  -22
  -24
  -25
  -27
  -28
  -30
  -31
  -33
  -35
  -37
  -39
  -41
  -43
  -45
  -48
  -50
Prev. year cash balance distribution, $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 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
  0
  0
  0
  2
  3
  6
  9
  13
  17
  16
  1
  5
  8
  13
  18
  23
  30
  36
  43
  51
  60
  69
  79
  90
  101
  114
  127
  141
  156
  172
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
  0
  0
  0
  1
  3
  4
  6
  8
  9
  8
  1
  2
  3
  4
  5
  6
  6
  7
  7
  7
  6
  6
  5
  5
  4
  3
  3
  2
  2
  1
Current shareholders' claim on cash, %
  90.5
  81.7
  74.0
  67.2
  61.5
  56.7
  52.9
  49.9
  47.7
  46.1
  46.1
  46.1
  46.1
  46.1
  46.1
  46.1
  46.1
  46.1
  46.1
  46.1
  46.1
  46.1
  46.1
  46.1
  46.1
  46.1
  46.1
  46.1
  46.1
  46.1

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, Inc. (AAOI)

Valuation Ratios
P/E Ratio 7.5
Price to Sales 0.9
Price to Book 1
Price to Tangible Book
Price to Cash Flow 4.1
Price to Free Cash Flow 33.4
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 $267 million for the last fiscal year's total revenue generated by Applied Optoelectronics, Inc.. The default revenue input number comes from 0001 income statement of Applied Optoelectronics, Inc.. 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 2% 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, Inc., 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, Inc..
    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 15.4%.

Fixed operating expenses is just that - expenses that are not dependant on the volume of production. They are set to $241 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 5.4% for Applied Optoelectronics, Inc..

Corporate tax rate of 27% is the nominal tax rate for Applied Optoelectronics, Inc.. 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 82.3%.

Life of production assets of 7.5 years is the average useful life of capital assets used in Applied Optoelectronics, Inc. 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 32.6%. 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 - $329.094 million for Applied Optoelectronics, Inc. - 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 19.883 million for Applied Optoelectronics, Inc. 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, Inc. at the current share price and the inputted number of shares is $0.3 billion.

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