Rosenblatt: This Stock Could Sink 33%

The analyst initiated coverage of AAOI with a 'sell' rating and brutal price target

Jun 11, 2018 at 2:02 PM
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After starting the month higher on hopes for the recent agreement between the U.S. and China's ZTE Corp., the shares of Applied Optoelectronics Inc (NASDAQ:AAOI) are getting drilled today. A Rosenblatt Securities analyst initiated coverage on AAOI stock with a "sell" recommendation and a $30 price target -- representing a drop of more than 33% from the equity's close on Friday. More specifically, the analyst expressed concerns about pricing wars and "unrealistic" gross margins, and said big-time customer and FAANG member Amazon (AMZN) isn't likely to contribute much to Applied Optoelectronic's third-quarter sales.

AAOI stock was last seen 7.7% lower at $41.86. The shares exploded more than 46% just in the month of May, but ran into resistance in the round-number $50 region. This area is where the stock landed after a mid-October bear gap, and is also home to the security's 320-day moving average. In addition, the $45 area has acted as a ceiling for AAOI shares in the past, and represents double the equity's April lows.

AAOI stock chart June 11

Recent Applied Optoelectronics options buyers may be getting nervous today. At the International Securities Exchange (ISE), Chicago Board Options Exchange (CBOE), and NASDAQ OMX PHLX (PHLX), the equity's 10-day call/put volume ratio stands at 8.23. In other words, options traders have bought to open more than eight AAOI calls for every put in the past two weeks. What's more, this ratio sits at an annual high, suggesting the collective appetite for bullish bets over bearish hasn't been higher in the past 12 months.

Of course, some of those recent call buyers -- particularly at out-of-the-money strikes -- may have been AAOI shorts seeking options insurance in the event of an extended rally. Short interest represents a whopping 78% of the security's total available float.

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