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Tiny AI Company Shares Soar 55% in 7 Days - Should You Buy?

Eric Bleeker

Published: July 19, 2024 9:05 am

While NVIDIA (Nasdaq: NVDA) and other large AI companies have seen their share prices tumble across the past couple of weeks, one smaller AI stock saw its share price surge 55% in seven days. We analyze why Applied Optoelectronics (Nasdaq: AAOI) saw its share price surge and what this says about AI stocks and the broader market today.

Key Points

• NVIDIA has seen its share price soar by more than 20,000% in the past 10 years. That’s thanks to the incredible growth in artificial intelligence. We recently released a brand-new free report named “The Next NVIDIA” that dives deep into 3 winners of what’s poised to be the next gold rush in AI. If you’re looking for new AI investment ideas, make sure to grab a copy today.
• Between July 5th and July 16th, Applied Optoelectronics saw its share price jump 55%.
• The key causes were 1.) A market-wide sector rotation to small caps 2.) Heavily shorted stocks seeing strong gains 3.) Investors increasingly looking for optical plays that could boom with rising AI demand.

Why Applied Optoelectronics Rallied 55% in 7 Trading Days

You can find some key highlights discussed by 24/7 Wall St. Analysts Eric Bleeker and Austin Smith below:

• On July 4th, 24/7 Wall St. published an article titled “3 Hidden Semiconductor Stocks with AI Exposure and Massive Upside.”
• In it, we singled out Applied Optoelectronics as a high-upside AI stock that was trading for only around $300 million.
• After the publication of that article, in less than seven days it jumped more than 50%.
• Volatility across the market has been on the rise and Applied Optoelectronics has given up some of those gains on Wednesday and Thursday of this week, but let’s explore why the stock suddenly started running and what that says about which AI stocks could excel in the current environment.
• So, first here are the details.
• Applied Optoelectronics closed July 5th trading for $7.67. By the July 16th close, it was trading for $11.89. That’s a 55% jump in 7 trading days.
• What caused such a large jump in shares? First, we need to look at the broader landscape.
• Last Thursday, the Federal Reserve issued comments that implied interest rates were coming sooner than expected.
• That’s led to the largest outperformance in small caps – as measured by the Russell 2000 – versus the S&P 500 in a week’s time ever. 
• In the week following these Fed comments, the Russell 2000 beat the S&P 500 by 10% and the Nasdaq-100 by 12%.
• The reason for this outperformance is investors rotating back into parts of the market that have struggled in recent years, and should see a strong boost if the economy heats up. 
• As a small cap, this rotation benefits a company like Applied Optoelectronics.
• Second, Applied Oppoelectronics was one of the most shorted stocks in the market before these Federal Reserve comments with about 24% of its shares sold short. Once this sector rotation started, it also triggered a short squeeze. 
• Third, and here’s what’s most important, we’ve also seen gains from other companies in the optical space. 
• There are huge shifts happening in the industry Applied Optoelectronics occupies. It has a relationship with Microsoft for the build-out of next-generation data centers. The question has been less about whether they’ll get more revenue from major 800G projects and more focused on when these projects might actually start. 
• But, thanks to the boom in AI data centers, this timeline keeps getting pushed up.
• Investors are starting to look for plays in Optics, they’re looking for plays in interconnects, they’re looking for plays in networking. 
• And as talk keeps pushing to one million cluster GPUs, the name Applied Optoelectronics is going to come up as a beneficiary of this trend. 
• So, to summarize, the sudden rally Applied Optoelectronics saw was a perfect storm for the stock. A historic sector rotation to small caps, a heavily shorted stock, and an industry investors are suddenly ravenously looking to. 
• Is Applied Optoelectronics a buy? Well, it’s certainly cheap relative to near-term expectations still. While the stock trades for $10 to 11, in the past year it traded for as high as $24.75. 
• So, I (24/7 Wall St. Analyst Eric Bleeker) personally like Applied. It’s obviously a small position and very speculative. However, keeping some irons in the fire around the next evolution of AI data centers is very smart, and this is a stock that fits the bill and has some recent trends around sector rotation in its favor. 
• Just keep in mind, this stock is going to be volatile and size a position accordingly.

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Transcript:

Eric, you published an article on July 4th titled Three Hidden Semiconductor Stocks with AI Exposure and Massive Upside.

Now, I loved this article.

And in it, you singled out applied optoelectronics as a high upside AI stock that was trading for just $300 million at the time.

I wish I had bought because in less than two weeks, as we film it today, the stock has already jumped more than 50%.

If only you gave me a heads up.

So the question is, have investors missed out on this stock or is there more potential upside ahead?

Yeah, that’s right.

So, you know, the stock is named Applied Optoelectronics.

That’s ticker symbol AAOI.

Closed July 5th, trained for $7.67.

By July 16th close was trained for $11 and 89 cents.

Obviously you go to July 17th, you know, there’s a lot of sell-offs in the market, especially around kind of the semiconductor space.

So, you know, they’ve lost some, but we’re talking about 55% jump in seven trading days.

So let’s look what’s going on first.

We need to examine the broader landscape.

Last Thursday, July 13th, we saw comments from the Fed imply that they’re going to cut interest rates sooner than expected.

That’s caused the greatest outperformance of small caps as measured by the Russell 2000 versus the S&P 500 in a week’s time ever.

The Russell 2000 has outperformed the S&P in that time by 10% and the NASDAQ by 12%.

The reason for this outperformance is investors, they’re rotating back into parts of the market that have struggled in recent years and should see relatively stronger boosts if the economy heats up.

So this rotation is helping Applied Opto Electronics as, well, let’s face it, a micro cap stock.

Now, at the start of this rally, the company was trading for 300 million in market cap.

Austin, it’s tiny.

Nowadays, $300 million stocks are basically penny stocks.

And second, AAOI was one of the most shorted stocks in the market when this started.

With about 24% of its shares sold short.

So, you know, I heard that noise there.

You know, as well as investors from the recent GameStop saga, if you’re heavily shorted, when you get a market rally of this size, it can create kind of a perfect storm, right?

And we have a third factor, and this is maybe what’s most important, especially for the long run, is we’re seeing gains from other companies in the broader optical space.

As I’ve noted previously, there are huge shifts happening in the AI industry, which I’ll get back to in a minute, but one which AAOIA does.

Occupies as a relationship with Microsoft for the build out of next generation data centers.

The question has mostly been when the build out with some of these products like 800G starts.

Now, investors, they’re trying to look for plays in this space.

They’re looking at optics, they’re looking at interconnects, they’re looking for plays in networking because the push that we’re going to make for right now is people talking about clusters of GPUs in these AI data centers.

We’re going from thousands to maybe a million.

And that’s where a name like Applied Optoelectronics is going to come up.

So to summarize, Austin, again, this has been a perfect storm for the company.

You have historic sector rotation to small caps.

You have a heavily short stock and you have an industry, a sector of this industry that suddenly investors are ravenously looking forward to as plays for these massive AI data centers.

So the question is applied optoelectronics a buy?

Well, it’s certainly cheap relative to near term expectations, even after the jump.

Well, the stock trades for about $11 per share.

And as we filmed this in the past year, it’s trade for as high as 24.75.

So even after a jump, it’s not anywhere near recent highs.

I personally like the stock.

It’s obviously a small position in my portfolio and speculative, but I like keeping some irons in the fire around this next evolution of data centers.

I think it’s very smart and it’s the kind of trade you wanna make if you’re watching the AI space.

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