UK Markets open in 43 mins.

Here's Why Applied Optoelectronics Inc. Shares Soared Today

Anders Bylund, The Motley Fool

What happened

Shares of Applied Optoelectronics (NASDAQ: AAOI) are on fire in Wednesday's trading session, rising 17.7% as of 2:45 p.m. EST. Tuesday night's third-quarter report beat Wall Street's estimates across the board, making it easy to embrace the stock on Wednesday.

So what

The maker of optical products, from low-level components to turnkey networking systems, saw top-line revenues rise 27% year over year, landing at $88.9 million. The growth spurt was driven by strong orders from data center and cable TV customers.

On the bottom line, adjusted earnings surged 184% higher, stopping at $1.08 per diluted share. The revenue gains were amplified by the mathematical fact that the year-ago period was a low point in AOI's recent history where fixed costs nearly zeroed out the bottom line entirely.

Analysts would have settled for earnings of $1.02 per share on sales near $88.5 million. Not a blowout, but still a significant surprise.

Closeup on a bundle of fiber-optic cables in moody lighting.

Image source: Getty Images.

Now what

Looking ahead, AOI's management expects fourth-quarter sales to hold almost completely steady year over year at roughly $85.5 million. Earnings should rise just 5% higher to $0.88 per share.

Here, your average analyst had been expecting earnings of $0.96 per share on sales of approximately $83.6 million. That type of mixed message doesn't always sit well with investors, often triggering a price cut even if the reported results came in strong.

Of course, investors approached AOI's report with caution. At Tuesday's market close, share prices had fallen a hair-raising 63% from early August's 52-week highs due to long-term worries about the company losing major contracts to rivals. This report didn't exactly prove those fears wrong, but management did provide a few soothing quotes about the competitive landscape.

"We remain a major supplier to all of our major customers for their long-reach transceiver needs and intra-data center applications," said CFO and chief strategy officer Stefan Murry. "We remain engaged with all those customers. We have orders from all the major customers that we have."

In a broader sense, the fiber-optic networking industry is knee deep in a shift toward next-generation components with higher data transfer rates, making every supplier's results lumpy and unpredictable until the new standards have been set. I expect Applied Optoelectronics to rise above its near-term challenges as the market steps up to this new product generation in support of 5G wireless networks.

More From The Motley Fool

Anders Bylund has no position in any of the stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.