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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?

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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.

Article printed from InvestorPlace Media,

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