We recently compiled a list of the 10 Best Emerging Tech Stocks to Buy Now. In this article, we are going to take a look at where Applied Optoelectronics Inc. (NASDAQ:AAOI) stands against the best-emerging tech stocks to buy.

Tech Industry’s Dominance is Here to Stay

Despite the recent market volatility of September, tech stocks remain a promising investment opportunity due to their strong earnings, potential for growth driven by AI capex investments, and solid financial fundamentals.

While quite a few analysts think it’s essential to diversify your portfolio away from tech to manage risks, especially in the middle of such a fluctuating market, the sector offers significant potential for long-term sustainable returns.

We recently covered UBS Global Wealth Management head of Americas Asset Allocation Jason Draho’s opinion in another article, 10 Best Tech Stocks To Buy Right Now Under $10. He thinks that while a balanced portfolio is essential for consistent long-term gains, tech stocks should not be shied away from for the rest of 2024. Here’s an excerpt from that article:

“While he’s optimistic about the technology sector, he acknowledged that the volatility will likely persist due to concerns about export controls and AI monetization. However, several factors make this sector attractive for the rest of the year. First, companies reported strong earnings results, although they may not be as spectacular as desired. Second, the AI capex investment story has potential upside for next year. Third, from a portfolio perspective, these companies are high-quality with solid earnings and balance sheets.

He thinks that this market volatility is acyclical. The recent sell-off in the tech sector was not primarily due to economic concerns but rather to sector-specific issues. Despite this, tech giants will continue to benefit from the AI capex investment story. While there may be short-term challenges, the long-term outlook for these companies remains positive. Focusing on the tech sector, rather than the broader MAG 7, is a better strategy for investors seeking to capitalize on the AI boom.”

Just last week, Mad Money host and former hedge fund manager Jim Cramer discussed his perspective on investing in Big Tech stocks during market downturns.

He believes that major technology firms, which are integral to ongoing robust trends like data centers and accelerated computing, should be viewed as attractive buying opportunities when the market weakens, instead of the opposite sentiment. So, when markets face a pronounced slow growth, tech stocks, particularly the large-cap leaders, are something to invest in, not divest from.

Cramer pointed out that September is historically the weakest month for the market, with consistent profit-taking. But, he sees this as a circular argument rather than a sign of an economic downturn. He believes the broader selling pressure in September is due to tech stocks meeting but not exceeding expectations.

On Wednesday, Chris Verrone, a strategist at Macquarie, in a discussion about buying financial stocks when they enter an oversold condition, also talked about the underperformance of the tech sector, especially the larger, established companies due to their perceived status as bond substitutes.

Verrone suggested that rate cuts could boost cyclical sectors, but experience shows mixed results. While tech has been a leader, other sectors like consumer discretionary and staples have also shown strength.

He believes that the market’s leadership changes are due to long-term planning. He notes that larger tech companies might be struggling because they are perceived as safer investments, similar to bonds. According to him, financials have performed well this year and are a potential investment opportunity, especially given their current oversold state. However, the financial sector typically performs better in the late fall.

Methodology

To compile our list, we used the Finviz stock screener to screen for technology companies with a market cap between $250 million and $1 billion. We then selected 10 stocks that were the most popular among elite hedge funds and that analysts were bullish on. The stocks are ranked in ascending order of the number of hedge funds that have stakes in them, as of Q2 2024. The hedge fund data was sourced from Insider Monkey’s database which tracks the moves of over 900 elite money managers.

Why are we interested in the stocks that hedge funds pile into? The reason is simple: our research has shown that we can outperform the market by imitating the top stock picks of the best hedge funds. Our quarterly newsletter’s strategy selects 14 small-cap and large-cap stocks every quarter and has returned 275% since May 2014, beating its benchmark by 150 percentage points (see more details here).

Applied Optoelectronics Inc. (NASDAQ:AAOI)

Market Capitalization as of September 11: $532.93 million

Number of Hedge Fund Holders: 25

Applied Optoelectronics Inc. (NASDAQ:AAOI) is a leading provider of optical components and modules for high-speed optical communications networks (telecom, FTTH, sensing, data center, wireless, and cable access industries). It manufactures a range of products, including transceivers, lasers, and optical subassemblies for various applications like in metro networks, and long-haul communications.

Applied Optoelectronics Inc. (NASDAQ:AAOI) generated $43.27 million in revenue for the second quarter of 2024, a 3.98% year-over-year improvement. The revenue for data center products of $34.4 million was up 25% compared to the same quarter in the prior year. Revenue for the 100G products increased 21%, and that for 400G products doubled in the same period.

However, revenue in the CATV segment was $5.8 million, which was down 38% year-over-year, driven by continued slow sales of DOCSIS 3.1 equipment.

The company just recently started receiving orders for 400G products from a large hyper-scale customer, shipping these products to 3 of the 5 largest hyper-scale data center customers in the US. There are positive results from the VCSEL-based 400G active optical cables, which Microsoft funded last year. Based on continued improvements, management expects better growth for the latter part of 2024.

25 hedge funds are long in Applied Optoelectronics Inc. (NASDAQ:AAOI), of which the largest shareholder is Point72 Asset Management. This stake has a position of $11,071,192. The company is well-positioned to meet the growing demand for 400G product orders and DOCSIS 4.0 solutions.

Overall AAOI ranks 5th on our list of the best emerging tech stocks to buy. While we acknowledge the potential of AAOI as an investment, our conviction lies in the belief that AI stocks hold great promise for delivering high returns and doing so within a shorter timeframe. If you are looking for an AI stock that is more promising than the stocks on our list but that trades at less than 5 times its earnings, check out our report about the cheapest AI stock.

READ NEXT: $30 Trillion Opportunity: 15 Best Humanoid Robot Stocks to Buy According to Morgan Stanley and Jim Cramer Says NVIDIA ‘Has Become A Wasteland’.

Disclosure: None. This article is originally published at Insider Monkey.