Image source: Acacia Communications.

What happened

Shares of Acacia Communications (NASDAQ:ACIA) slumped on Thursday following a disappointing report from one of its largest customers, ZTE Corp. (OTC:ZTCOY). At 12 p.m. EDT, the stock was down about 12%.

So what

According to Acacia's most recent quarterly SEC filing, ZTE accounted for 37.9% of the company's total revenue during the first six months of 2016. Acacia's five largest customers accounted for nearly 80% of total revenue during that period, suggesting substantial concentration risk for the company.

ZTE reported third-quarter operating revenue of 23.8 billion yuan, up 5.23% year over year but well below the average analyst estimate of 26.3 billion yuan. With ZTE accounting for such a significant portion of Acacia's revenue, it's not surprising that the stock took such a large hit on the news.

Now what

Since going public earlier this year, shares of Acacia have been volatile. The stock initially surged in its first few months as a public company, but some of those gains have now been lost.

ACIA Chart

ACIA data by YCharts.

Acacia trades for about eight times trailing-12-month sales, a valuation that bakes in substantial growth expectations. With Acacia highly dependent on a small number of customers, further shocks in the future are certainly possible.

This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium advisory service. We’re motley! Questioning an investing thesis -- even one of our own -- helps us all think critically about investing and make decisions that help us become smarter, happier, and richer.