With investors currently having their tails between their legs, rather than their heads in the clouds, optical device, cloud communications play and recent Initial Public Offer Acacia Communications (NASDAQ:ACIA) looks poised to enjoy better days ahead.
For IPO’s and in particular, those IPO’s with growth stories that have investors wishfully dreaming of owning the next Microsoft Corporation (NASDAQ:MSFT) or Apple Inc. (NASDAQ:AAPL); market reality checks can be punishing.
That has been the case for shares of Acacia.
Following a sizzling late-summer run in ACIA stock price which saw shares up nearly 250% from Acacia’s secondary market May low; shares have retreated from an all-time-high of $128.73 to near $74.50 and shed more than 50% at the recent low of $61.80 on Nov. 4.
Behind the bearish investor about-face, a couple issues stand out. First and after a bit of modest profit-taking in September, Acacia announced an unwelcome 4.5-million-share secondary priced at $100.
Maybe a larger issue with ACIA’s follow-on deal is that, of the money being raised, 73% was being distributed to “certain existing shareholders” and only 27% was directed towards the funding company growth.
Pressure on ACIA shares was, as might be imagined, helped along by Acacia’s lock-up period ending on Nov. 9 — and when potentially, shares can be dumped onto the market by existing stockholders.
Lastly, after blowing out Street views in its inaugural earnings report, it’s likely some of Acacia’s weakness was the result of pre-earnings jitters and whether Acacia could trump forecasts with a similarly strong, sophomore result.
The good news is that ACIA stock has largely gotten through all three events. While the secondary was damning to existing shareholders, today’s near-30% discount shows that has more than been priced in.
Secondly, the end to the lock-up period has maybe stymied ACIA stock modestly, but the fact shares have failed to move lower is, in our estimation, a constructive sign of underlying support from other investors.
Also, Acacia shareholders should be breathing easier following another earnings and sales beat amidst triple-digit revenue growth.
The company does expect 2017 comps to be tough, but according to Needham & Co., “Acacia said all the right things on the call and offered guidance with plenty of room for further upside on the Q4 print in February.”
ACIA Stock Daily Chart
The past couple weeks have been marked by decent technical testing in ACIA within the 50%-62% retracement support band. With Tuesday’s firming price action, Acacia shares are signaling a small, higher-low double bottom pattern.
A breakout above recent highs near $77 is anticipated and I’d expect renewed price momentum to carry Acacia into the $90 – $95 area before 50-day simple moving average and Bollinger Band resistance come into play.
If ACIA stock fails to move higher, the recent low is considered important. Shares broke 62% support marginally in early November. A second price break could incite potential “lock-up” sellers to unload, as well as ordinary investors long Acacia in the open market.
Acacia Long Bull Call Spread
Reviewing the ACIA stock options board and given what’s been addressed on and off the price chart, I like the Dec $80/$85 bull call spread.
With ACIA stock near $73.50 the out-of-the-money vertical fetches around $1.75.
If shares of Acacia were to rally strongly and above the sold $85 strike call at expiration, the spread would be worth $5, resulting in a net profit of $3.25, or 185%.
On the downside, risk in the ACIA vertical is contained to the debit paid. However, given our view, a retest of the recent low is prone to additional selling pressure, using money management and exiting for a lesser loss makes good sense.
Investment accounts under Christopher Tyler’s management do not currently own positions in any of the securities or their derivatives mentioned in this article. The information offered is based upon Christopher Tyler’s observations and strictly intended for educational purposes only; the use of which is the responsibility of the individual. For additional market insights and related musings, follow Chris on Twitter @Options_CAT.
