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Applied Optoelectronics, Inc (NASDAQ:AAOI), a provider of fiber-optic networking products, will attempt to raise $50.4 million in its upcoming IPO next week with two second tier firms acting as Joint Underwriters. The Sugarland, Texas based firm will offer 3.6 million shares at an expected price of $13-15; if the price hits the midpoint of that range, AAOI will command a market value of $182 million.

AAOI filed on August 13, 2013.
Joint Managers: Raymond James, Piper Jaffray
Co-Managers: Cowen & Co., Roth Capital Partners

SUMMARY
Applied Optoelectronics designs and manufactures a range of fiber-optic networking products, primarily for three high growth markets: cable television, fiber-to-the-home, and internet data centers. The company is vertically integrated, and designs and manufactures most of the laser chips and optical components used in its products. It also uses a unique Molecular Beam Epitaxy fabrication process to integrate its lasers into its products.

The firm's largest and best-established market is cable television, for which it provides lasers, transmitters, and turn-key equipment. In 2012, AAOI was the largest provider of optical components and the second largest provider of subsystem components in the cable television industry. Customers in the cable television industry have increasingly turned to outsourcing for their fiber-optic equipment, as the complexity of engineering involved in designing and producing this equipment has grown considerably over the course of the past few years.

VALUATION
AAOI offers the following figures in its S-1 balance sheets for the six months ending June 30, 2013:
Revenue: $33,914,000
Net Income: ($1,276,000)
Total Assets: $71,996,000
Total Liabilities: $12,084,000
Stockholders' Equity: ($30,540,000)

AAOI has shown solid revenue growth, with a CAGR of 36.4% between 2009 and 2012. However, the company has been unable to turn profitable, posting losses of $3.4 million, $5.3 million, and $0.9 million for the years of 2010, 2011, and 2012, respectively, and a loss of $1.3 million for the six month period ending June 30, 2013. However, the company was profitable from an EBITDA basis last year and hopefully will be profitable on a GAAP basis in the next couple years.

CONCLUSION

AAOI has shown an ability to grow its revenues, it serves three high growth optical access markets, and has a flat cost structure and rising revenues which is fueling increasing margins. The executive compensation at AAOI is also reasonable for a growing technology company.

Its inability to convert growth into profit is very concerning after being in business for so many years. AAOI's reliance on only a handful of customers for the bulk of its revenues is also troubling, as AAOI's products are hardly unique and there's no guarantee that those customers will continue to purchase from AAOI.

In 2012, Cisco Systems (NASDAQ:CSCO) and Biogenomics Corp accounted for a combined 44.4% of all of AAOI's revenues. In the six months ending June 30, 2012, AAOI's top ten customers accounted for 76.3% of its revenues.

Our rating is a close call but we don't expect to be buyers of AAOI unless the deal prices at $12 or below.

BUSINESS

Rising demand for bandwidth generated by the increasing amounts of data consumers want to use is driving a favorable market for producers of fiber-optic network products. This increased demand is attracting competitors to the market, and AAOI has some competitive edge, especially given its vertical integration.

AAOI's reliance on cable television for the bulk of its revenue is a caution in light of the industry's increasing competition from internet television providers. However, AAOI does produce technology for internet providers but it does not have the same level of established relationships with the leaders in that field as it does in cable television.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

Additional disclosure: This article was written for informational purposes and partly based on the company's S-1. Investors should consult with their financial advisor before making any decisions on this IPO.

Source: IPO Of Applied Optoelectronics Is Not An Exciting Tech Offering