Reminder: Playing Earnings is For Riverboat Gamblers — $AAOI $YELP

The two big stories today for trader-fags is the rise and fall of two endeared stocks: AAOI, YELP.

For years, people have been waiting for YELP to do something, smash earnings, gain real traction, get acquired. More or less, holding the stock has been equal to watching paint dry — until today. The company sold Eat24 to Grubhub, which is a win for both companies. YELP earned a handsome profit on the deal and GRUB gets to consolidate their industry.

On the earnings side, the company beat, guided up and announced a $200 million share buyback.

Yelp beats by $0.04, beats on revs; guides Q3 revs in-line; raises bottom end of FY17 rev guidance (midpoint above consensus); approves $200 mln share repurchase program.

Here’s what analysts think.

Needham maintains Buy rating, PT $43. The firm notes advertising growth, particularly self-service, was the key revenue upside driver. The firm sees several revenue growth levers to still pull, including improvements in retention, monetization, sales productivity, as well as ongoing growth in Self-Service and National advertising and marketing optimization.

RBC stays at Sector Perform, ups PT to 36 from 27. The firm believes the key news is Eat24 sale to Grubhub at 2X acquisition price.

Stifel stays at Hold, TGT $35. The firm is encouraged by improving trends in Yelp’s core business and think the Grubhub deal is a rare ‘win / win’ scenario for both companies, as Yelp earned a strong return on the sale of Eat24 and can now focus more of its resources on its core platform rather than capital intensive adjacent businesses. However, the firm thinks Yelp still faces significant challenges to reinvigorating its growth over a sustained period, but the company’s improved focus / stronger balance sheet should boost its chances of success.

On the downside is optical darling AAOI. To condense what this company does for the retards out there, this is a play off Amazon’s expansion into web services. Plain and simple, as the datacenter build out, so does demand for AAOI’s products. The issue here is the dramatic slowdown in 40g technology. This is like when NFLX was citing poor DVD rentals sales, at a time when they were transitioning to streaming. DVDs were still their core business, but streaming was their future. Today, DVDs account for a mere fraction of NFLXs overall sales.

Same here with AAOI, as they transition to 100g products. My main concern is, however, their reliability on just a handful of customers. The concentration of revenue is indeed a significant risk and you should know that when holding the stock into earnings.

Co issues guidance for Q3, sees EPS of $1.30-1.43, excluding non-recurring items, vs. $1.34 Capital IQ Consensus Estimate; sees Q3 revs of $107-115 mln vs. $123.99 mln Capital IQ Consensus Estimate.

“We are pleased with our team’s continued solid execution in the quarter, which marked our ninth consecutive quarter of generating record datacenter revenue. However, as we look into the third quarter, we see softer than expected demand for our 40G solutions with one of our large customers that will offset the sequential growth and increased demand we expect in 100G. We believe AOI has a leading position in the advanced optics market and we continue to expand within our existing customer base as well as engage with new customers for 100G technologies and beyond.”

Here’s what an analyst at BWS thinks.

BWS noes AAOI is citing a slowdown in 40G orders as a reason for guiding third quarter revenue sequentially down. Their thesis has been built on the expectation 40G would begin to decline and AAOI would not be able to sell enough 100G to make up the difference. This seems to be playing out even though AAOI was quick to note it is ramping 100G production. They do not believe that becomes relevant in the short-term since the growth AAOI was being valued for is disappearing. Without any price cuts AAOI asserted it did not have committed orders affirming cautious stance and limited visibility into fourth quarter.

Shares of YELP are +25%, while AAOI is down 25%.

Welcome to earnings season, where fortunes are made and lost in a blink of an eye.