Applied Optoelectronics Inc: Why This 5G Play May Be on Verge of Big Rally

Applied Optoelectronics Stock Could Be at an Infliction Point on the Chart

Technology stocks are currently seeing some weakness following years of outperformance. While the short-term situation looks foggy, I remain long-term bullish on contrarian opportunities such as Applied Optoelectronics Inc (NASDAQ:AAOI).

AAOI stock traded at $103.00 in July 2017. The fall has been devastating for investors, as the share price currently sits around $8.00.

While the share-price deterioration offers little confidence, I see an aggressive opportunity to add shares of an end-to-end provider of fiber-optic networking solutions, including applications for 5G.

After poor financial results in 2018 and 2019, Applied Optoelectronics Inc delivered some hope in 2020. If the company can continue to improve its fundamentals, Applied Optoelectronics stock could rally.

Chart courtesy of StockCharts.com

My Technical Spin on AAOI Stock

A look at the above chart shows Applied Optoelectronics stock rallying from its March 2020 low of $6.32 to well above its pre-COVID-19 level in August 2020, when the stock traded at $17.57.

AAOI stock faced downward pressure in late August 2020, when the trendline support was breached and the stock entered a downward channel.

This was highlighted by a death cross pattern last November. A death cross is a bearish technical pattern in which the 50-day moving average breaks below the 200-day moving average.

At this juncture, Applied Optoelectronics stock is drifting just above key support, which is just below $8.00, and is looking to hold.

Chart courtesy of StockCharts.com

Given the current weak relative strength at 30, AAOI stock will need some help in order to rally.

The good news is that Applied Optoelectronics Inc shares have a recent history of rallying after declining to a relative strength of about 30.

In May and November 2020, Applied Optoelectronics stock staged a strong rally after its relative strength bottomed. We could be seeing the same thing unfolding now.

Moreover, if AAOI stock holds at $8.00, the chart indicates the potential of a rally off a bullish double bottom.

Applied Optoelectronics stock could target $10.00, followed by $12.00–$14.00 on a rally, which implies that a near-doubling is possible.

Analyst Take

So while the technical picture shows a good risk/reward opportunity for AAOI stock, Applied Optoelectronics Inc’s improving fundamentals could jump-start a rally, especially if the company can drive its 5G sales.

Applied Optoelectronics stock trades at a cheap 0.77 times the company’s consensus 2022 revenue estimate and at 72% of its book value. Compare that to some of the excessive valuations in the technology sector, and a bullish case can be made for AAOI stock.