The brief China boom in optics attracted a lot of fascination from members of the financial community, many of whom had no appreciation of the historic nature of the industry. Before this period, investors were not even close to being as interested with such suppliers, and would kind of stay away from stocks (as always, fibeReality does not recommend any kind of security). For example, we have pointed out before that there was very little venture capital money spent on 100G. So, more recently, our firm would consult to investment bankers, VC firms, etc., who were legitimately doing due diligence, as they would point out how remarkably well these optical component firms were performing, and they were enthusiastic about using their capital in this space, or even considering taking a particular vendor public. In addition to a specific evaluation by us of a manufacturer, our response would tend to be (and would possibly need to be repeated several times) that they were not going back far enough in their analysis of the market data, and such a revelation could be quite embarrassing for certain individuals, who might even have their managers on the phone call. When it comes to AOI in particular, which has benefited despite not being a major vendor to China, it is most importantly about remembering that even the largest transceiver vendors would tend to settle in the low-30s over the years. This realization and perhaps others probably explains the rather limited support by the investment crowd currently for AOI.
The development lately of a large amount of short covering involving AOI is indicative of the unattractive nature of the company. Certainly, reporting early only on the perceived good news the last quarter is not helping the firm’s credibility. Also, despite its dramatic cost-cutting efforts, it is hard to imagine how many other times it can pull off gross margins percentages, which are into the 40s, because certainly the stars aligned in just the right way over that three-month period.
Then there was Intel at ECOC 2017, which provided a presentation during the Market Focus session, which would almost make one forget that it abandoned the optical realm several years ago. There was a lot of nervous energy exhibited when this writer approached its booth. Of course, fibeReality is not alone in questioning the sincerity of its purported intentions in this market or in others. However, certain influential participants on the Street may take it seriously, as the session was packed. Nevertheless, regardless of actual quantities shipped, there is still no question in our minds that Intel helped to cripple the 100G PSM4 space.
We have also found that people working for AOI will not hesitate to continue to criticize Amazon’s ability to make 100G CWDM4 transceivers (who will then add quickly afterwards that it is a personal opinion, after being told that maybe they should be careful about knocking its biggest customer). AOI is also feverishly going after every new specification that is out there to help ensure revenues remain adequate, which may bring up the matter of possibly spreading itself too thin.
Concerning what is not tended to be stated by the financial crowd is that the dominant manufacturers in the intra-data center space are all small, including InnoLight Technology, Kaiam – and one that is almost never mentioned, ColorChip. If the market is so great for these components, why are the big players not making it a priority?
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[written by Mark Lutkowitz]