Should You Buy Acicia Communications, Inc. (ACIA) Stock? 3 Pros, 3 Cons

Acicia has a booming business offset by a sinking stock price. Can ACIA stock top $100 again in 2017?

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.

Should You Buy Acicia Communications, Inc. (ACIA) Stock? 3 Pros, 3 Cons

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.

ACIA Stock Pros

Monster Growth Rate: The key tenet of the bull thesis for ACIA stock is simple. This company offers sizzling growth. In the most recent quarter, Acacia reported $135 million in revenue. That represented a massive 107% growth rate.

While growth at that rate generally can’t be sustained all that long, there is an encouraging sign here. ACIA reported that of its newer customers, sales to its most recently added customers are up 37% sequentially.

That’s compared with a more modest 11% growth rate generated from their original eight customers. Acacia’s revenue growth rate is sure to slide in the future, these gigantic numbers now are off a small base. However, Acacia has already transitioned into being a profitable company, putting it in a better place than many young tech companies.

Surging Margins: That profitability is in large part due to Acacia’s rising profit margins. There appears to be massive scalability in ACIA’s operations, with each dollar of incremental revenue coming at a low cost to the firm.

Its gross margin has risen over the past few years, moving from the mid-30s to the mid-40s. Prior to this year, the company never earned a 40%+ gross margin; over the past 12 months, all four quarters came in above that mark. The most recent quarter was the best yet, rising to 46.8%. It doesn’t stop there: the benefits are filtering down to income, as well. The company suffered a 1% drop in its operating margin in 2013, this rose to 13% in 2014, 18% in 2015 and 22% over the last 12 months. Combine rising margins and exploding revenues, and you tend to get good share price results.

Great Balance Sheet: ACIA stock has a fantastic balance sheet to back it up. Even prior to the company’s IPO, it carried some cash and had no debt. Now, post-IPO and with profits rising, its cash position has now grown to almost $200 million. That stands against no debt whatsoever. The company generated $79 million in operating cash flow and $63 million in free cash flow over the last 12 months, and with sales and margins ramping, these figures should increase in the coming year.

While most investors own Acacia stock for the growth story, the balance sheet provides a strong backstop. The company can pursue M&A activities as needed, invest more heavily in research and development, or whatever else may be necessary to ensure the firm’s competitive position. You won’t find many tech companies with such high growth prospects that also have strong financial statements in the present.

Bottom Line on Acacia Stock

Don’t let the recent slump in ACIA stock scare you away. The volatility alone isn’t a good reason to dump Acacia stock. The company is posting astounding revenue growth, and is managing to show strongly uptrending profitability metrics at the same time. This is everything you want to see in a young tech firm, and the flawless balance sheet only strengthens the allure.

However, don’t forget the cons. Insiders are aggressively selling stock. Do they know something we don’t? It’s worth watching the company’s competitors in 2017 to see if they can damage Acacia’s momentum.

At the time of this writing, Ian Bezek had no positions in any of the aforementioned stocks. You can reach him on Twitter at @irbezek.

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