Acacia Communications, Inc. (NASDAQ:ACIA) is a victim of its own success. ACIA stock quadrupled in the months following its IPO. Investors who got in at the $30 opening have had a tremendous ride. However many folks bought closer to the $128-per-share high than the IPO price.
For people who hopped onto Acacia stock later, the journey has been a difficult one.
ACIA stock got cut in half to end 2016. But this isn’t necessarily Acacia’s fault, the company’s first earnings report as a public company delivered. Acacia stock represents a common problem. Investors get ahead of themselves bidding up a promising company, and overvaluation forces shares to fall even as earnings growth continues.
Shares are down again sharply this week, as ACIA stock busted technical support at the $60-level. Acacia stock plunged Tuesday following the company’s presentation at the Needham Growth Conference. With that in mind, is the latest sharp decline a good buying opportunity, or should investors stand aside?
ACIA Stock Cons
Plenty of Competition: ACIA stock ripped following the IPO, as investors piled into a company with a huge growth rate. But don’t assume that it has a market to itself. Acacia is up against a great deal of competition. Competitors include Lumentum Holdings Inc (NASDAQ:LITE), Oclaro, Inc. (NASDAQ:OCLR), and Finisar Corporation (NASDAQ:FNSR).
Incredibly enough, all three of those peer companies saw their stocks double over the past year as well. It’s fair to say that investors are enamored with the whole sector. However, to the winner will go the spoils; it’s unrealistic to expect that all these firms will continue to simultaneously prosper.
Concentrated Customer Base: Acacia has grown rapidly. Founded in 2009, the firm is already up to half a billion dollars a year in sales. That’s outstanding! Unfortunately it has achieved this growth with a very limited customer base.
The company only counts about two dozen customers currently. And only a few of those are important to the company’s outlook. Five customers make up 80% of the company’s sales at the moment. That leaves it vulnerable to any weakness or change in priorities among its buyers; even one customer defection would be a significant blow to the company’s momentum and ACIA stock.
Insiders Selling (More) Stock: It’s easy to look at a company like Acacia and get excited. The company is growing revenues at a triple-digit rate. Backing that up, the company’s end market appears likely to deliver more strong demand in 2017. However, if the story ahead is so bright, you’d think management would be excited too.
Instead, insiders have been selling stock. A lot of it. Just months after the IPO, Acacia launched a large secondary offering to dump more stock on the market. The secondary went off around $100 per share, well down from the $130-high earlier in last fall. And with shares continuing to tumble, insiders haven’t stopped selling. Already in 2017, we have another insider sell, with Acacia corporate controller Francis Murphy unloading thousands more shares.