Intrinsic value of Applied Optoelectronics - AAOI

Previous Close

$21.91

  Intrinsic Value

$38.20

stock screener

  Rating & Target

str. buy

+74%

Previous close

$21.91

 
Intrinsic value

$38.20

 
Up/down potential

+74%

 
Rating

str. buy

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 0.4

 

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
  390
  399
  409
  421
  433
  447
  463
  479
  497
  516
  536
  558
  581
  606
  632
  660
  689
  720
  753
  788
  824
  863
  903
  946
  991
  1,038
  1,088
  1,141
  1,196
  1,254
Variable operating expenses, $m
  186
  190
  195
  200
  206
  213
  220
  228
  236
  245
  255
  265
  276
  288
  300
  313
  327
  342
  357
  374
  391
  410
  429
  449
  470
  493
  517
  542
  568
  595
Fixed operating expenses, $m
  120
  122
  125
  128
  130
  133
  136
  139
  142
  145
  149
  152
  155
  159
  162
  166
  169
  173
  177
  181
  185
  189
  193
  197
  202
  206
  211
  215
  220
  225
Total operating expenses, $m
  306
  312
  320
  328
  336
  346
  356
  367
  378
  390
  404
  417
  431
  447
  462
  479
  496
  515
  534
  555
  576
  599
  622
  646
  672
  699
  728
  757
  788
  820
Operating income, $m
  85
  87
  90
  93
  97
  101
  106
  112
  118
  125
  133
  141
  150
  160
  170
  181
  193
  205
  219
  233
  248
  264
  281
  300
  319
  339
  361
  384
  408
  434
EBITDA, $m
  106
  108
  112
  116
  120
  125
  131
  138
  145
  153
  161
  171
  181
  192
  203
  216
  229
  243
  258
  274
  292
  310
  329
  350
  371
  394
  419
  444
  471
  500
Interest expense (income), $m
  2
  3
  3
  3
  3
  3
  4
  4
  4
  4
  5
  5
  5
  6
  6
  6
  7
  7
  8
  8
  9
  9
  10
  11
  11
  12
  13
  14
  15
  15
  16
Earnings before tax, $m
  82
  84
  87
  90
  93
  98
  103
  108
  114
  121
  128
  136
  144
  154
  163
  174
  185
  197
  210
  224
  239
  254
  271
  288
  307
  326
  347
  369
  393
  418
Tax expense, $m
  22
  23
  23
  24
  25
  26
  28
  29
  31
  33
  35
  37
  39
  41
  44
  47
  50
  53
  57
  60
  64
  69
  73
  78
  83
  88
  94
  100
  106
  113
Net income, $m
  60
  61
  63
  66
  68
  71
  75
  79
  83
  88
  94
  99
  105
  112
  119
  127
  135
  144
  153
  163
  174
  186
  198
  210
  224
  238
  254
  270
  287
  305

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
  448
  459
  470
  484
  498
  514
  532
  551
  571
  593
  617
  642
  668
  697
  727
  758
  792
  828
  865
  905
  947
  991
  1,038
  1,087
  1,139
  1,194
  1,251
  1,311
  1,375
  1,442
Adjusted assets (=assets-cash), $m
  448
  459
  470
  484
  498
  514
  532
  551
  571
  593
  617
  642
  668
  697
  727
  758
  792
  828
  865
  905
  947
  991
  1,038
  1,087
  1,139
  1,194
  1,251
  1,311
  1,375
  1,442
Revenue / Adjusted assets
  0.871
  0.869
  0.870
  0.870
  0.869
  0.870
  0.870
  0.869
  0.870
  0.870
  0.869
  0.869
  0.870
  0.869
  0.869
  0.871
  0.870
  0.870
  0.871
  0.871
  0.870
  0.871
  0.870
  0.870
  0.870
  0.869
  0.870
  0.870
  0.870
  0.870
Average production assets, $m
  177
  181
  186
  191
  197
  203
  210
  218
  226
  234
  244
  253
  264
  275
  287
  300
  313
  327
  342
  358
  374
  392
  410
  429
  450
  471
  494
  518
  543
  569
Working capital, $m
  77
  79
  81
  83
  86
  89
  92
  95
  98
  102
  106
  111
  115
  120
  125
  131
  136
  143
  149
  156
  163
  171
  179
  187
  196
  206
  215
  226
  237
  248
Total debt, $m
  52
  55
  58
  61
  65
  70
  75
  80
  85
  91
  98
  104
  112
  119
  127
  136
  145
  155
  165
  176
  187
  199
  212
  225
  239
  254
  269
  286
  303
  321
Total liabilities, $m
  121
  124
  127
  131
  135
  139
  144
  149
  155
  161
  167
  174
  181
  189
  197
  206
  215
  224
  235
  245
  257
  269
  281
  295
  309
  323
  339
  355
  373
  391
Total equity, $m
  327
  334
  343
  353
  363
  375
  388
  402
  416
  432
  449
  468
  487
  508
  530
  553
  578
  603
  631
  660
  691
  723
  757
  793
  830
  870
  912
  956
  1,002
  1,051
Total liabilities and equity, $m
  448
  458
  470
  484
  498
  514
  532
  551
  571
  593
  616
  642
  668
  697
  727
  759
  793
  827
  866
  905
  948
  992
  1,038
  1,088
  1,139
  1,193
  1,251
  1,311
  1,375
  1,442
Debt-to-equity ratio
  0.160
  0.160
  0.170
  0.170
  0.180
  0.190
  0.190
  0.200
  0.200
  0.210
  0.220
  0.220
  0.230
  0.230
  0.240
  0.250
  0.250
  0.260
  0.260
  0.270
  0.270
  0.280
  0.280
  0.280
  0.290
  0.290
  0.300
  0.300
  0.300
  0.310
Adjusted equity ratio
  0.729
  0.729
  0.729
  0.729
  0.729
  0.729
  0.729
  0.729
  0.729
  0.729
  0.729
  0.729
  0.729
  0.729
  0.729
  0.729
  0.729
  0.729
  0.729
  0.729
  0.729
  0.729
  0.729
  0.729
  0.729
  0.729
  0.729
  0.729
  0.729
  0.729

CASH FLOW

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Net income, $m
  60
  61
  63
  66
  68
  71
  75
  79
  83
  88
  94
  99
  105
  112
  119
  127
  135
  144
  153
  163
  174
  186
  198
  210
  224
  238
  254
  270
  287
  305
Depreciation, amort., depletion, $m
  21
  22
  22
  23
  23
  24
  25
  26
  27
  28
  28
  29
  31
  32
  33
  35
  36
  38
  40
  42
  44
  46
  48
  50
  52
  55
  57
  60
  63
  66
Funds from operations, $m
  81
  83
  85
  88
  92
  95
  100
  105
  110
  116
  122
  129
  136
  144
  153
  162
  172
  182
  193
  205
  218
  231
  245
  260
  276
  293
  311
  330
  350
  371
Change in working capital, $m
  2
  2
  2
  2
  3
  3
  3
  3
  4
  4
  4
  4
  5
  5
  5
  5
  6
  6
  6
  7
  7
  8
  8
  8
  9
  9
  10
  10
  11
  12
Cash from operations, $m
  79
  81
  83
  86
  89
  93
  97
  101
  106
  112
  118
  124
  132
  139
  148
  156
  166
  176
  187
  198
  210
  223
  237
  252
  267
  284
  301
  320
  339
  360
Maintenance CAPEX, $m
  -20
  -21
  -21
  -22
  -22
  -23
  -24
  -24
  -25
  -26
  -27
  -28
  -29
  -31
  -32
  -33
  -35
  -36
  -38
  -40
  -42
  -44
  -46
  -48
  -50
  -52
  -55
  -57
  -60
  -63
New CAPEX, $m
  -4
  -4
  -5
  -5
  -6
  -6
  -7
  -7
  -8
  -9
  -9
  -10
  -11
  -11
  -12
  -13
  -13
  -14
  -15
  -16
  -17
  -17
  -18
  -19
  -20
  -22
  -23
  -24
  -25
  -26
Cash from investing activities, $m
  -24
  -25
  -26
  -27
  -28
  -29
  -31
  -31
  -33
  -35
  -36
  -38
  -40
  -42
  -44
  -46
  -48
  -50
  -53
  -56
  -59
  -61
  -64
  -67
  -70
  -74
  -78
  -81
  -85
  -89
Free cash flow, $m
  56
  56
  58
  59
  61
  63
  66
  69
  73
  77
  81
  86
  92
  97
  104
  110
  118
  125
  134
  143
  152
  162
  173
  185
  197
  210
  224
  238
  254
  270
Issuance/(repayment) of debt, $m
  2
  3
  3
  4
  4
  4
  5
  5
  6
  6
  6
  7
  7
  8
  8
  9
  9
  10
  10
  11
  11
  12
  13
  13
  14
  15
  16
  16
  17
  18
Issuance/(repurchase) of shares, $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 from financing (excl. dividends), $m  
  2
  3
  3
  4
  4
  4
  5
  5
  6
  6
  6
  7
  7
  8
  8
  9
  9
  10
  10
  11
  11
  12
  13
  13
  14
  15
  16
  16
  17
  18
Total cash flow (excl. dividends), $m
  58
  59
  61
  63
  65
  68
  71
  75
  79
  83
  88
  93
  99
  105
  112
  119
  127
  135
  144
  154
  164
  174
  186
  198
  211
  225
  239
  255
  271
  288
Retained Cash Flow (-), $m
  -7
  -8
  -9
  -10
  -11
  -12
  -13
  -14
  -15
  -16
  -17
  -18
  -19
  -21
  -22
  -23
  -25
  -26
  -27
  -29
  -31
  -32
  -34
  -36
  -38
  -40
  -42
  -44
  -46
  -49
Prev. year cash balance distribution, $m
  13
  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
  65
  52
  52
  53
  54
  56
  58
  61
  64
  67
  71
  75
  79
  84
  90
  96
  102
  109
  117
  125
  133
  142
  152
  162
  173
  185
  197
  211
  225
  239
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
  62
  47
  45
  44
  42
  41
  39
  38
  37
  35
  34
  32
  30
  28
  26
  24
  22
  20
  18
  16
  14
  12
  10
  8
  7
  5
  4
  3
  2
  2
Current shareholders' claim on cash, %
  100.0
  100.0
  100.0
  100.0
  100.0
  100.0
  100.0
  100.0
  100.0
  100.0
  100.0
  100.0
  100.0
  100.0
  100.0
  100.0
  100.0
  100.0
  100.0
  100.0
  100.0
  100.0
  100.0
  100.0
  100.0
  100.0
  100.0
  100.0
  100.0
  100.0

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 13
Price to Sales 1.5
Price to Book 1.8
Price to Tangible Book
Price to Cash Flow 7.1
Price to Free Cash Flow 57.6
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 $382.329 million for the last fiscal year's total revenue generated by Applied Optoelectronics. The default revenue input number comes from 0001 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 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, 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 47.6%.

Fixed operating expenses is just that - expenses that are not dependant on the volume of production. They are set to $117 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.

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 45.4%.

Life of production assets of 8.6 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 19.8%. 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 - $333.276 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 19.698 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 $0.4 billion.

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COMPANY NEWS

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▶ Applied Optoelectronics: 2Q Earnings Snapshot   [06:29PM  Associated Press]

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