Please ensure Javascript is enabled for purposes of website accessibility

Why Acacia Communications, Inc. Fell 27% in April

By Asit Sharma – May 10, 2018 at 5:29PM

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More

The optical networks component maker learned the risks inherent in holding a significant customer concentration.

What happened

Stock in optical interconnect products provider Acacia Communications (ACIA) fell 26.8% in April, according to data from S&P Global Market Intelligence 

So what

Acacia's stock slumped drastically on April 16 as the U.S. announced a seven-year ban on sales by U.S. companies to Chinese telecommunications-equipment manufacturer ZTE (ZTCOY). ZTE is alleged to have lied to the U.S. government about its equipment sales to Iran, in violation of U.S. sanctions.

Acacia immediately suspended affected transactions -- and its stock felt immediate pain. As my colleague Leo Sun pointed out when analyzing this news in April, ZTE accounted for 30% of Acacia's sales in 2017.

While this is a significant blow for the transmissions specialist, shareholders were able to obtain some perspective on Acacia's prospects from management in early May, when the company released first-quarter 2018 results on May 3. During Acacia's post-earnings conference call, CEO Murugesan Shanmugaraj acknowledged that the immediate loss of revenue will be painful for the company, but pointed to a few bright spots and provided a game plan for the current year.

Shanmugaraj reported that several product lines were exhibiting relative health. For example, the company's CFP2-DCO module continued to experience wide acceptance from new and existing customers and accounted for more than 10% of Acacia's revenue during the first quarter. On a more general note, Shanmugaraj sought to reassure investors that Acacia's niche of converting optical interconnect technology to silicon-based technology still holds much market potential -- despite the ban on business with such a significant customer.

As for dealing with the ZTE situation, management has indicated that it will decrease its targeted year-over-year operating expense growth in light of the lost revenue. But Acacia intends to pursue new business opportunities with other Chinese manufacturers, and executives somewhat surprisingly contend that revenue may increase in the second half of 2018 against the prior year. Finally, Acacia announced a $60 million share-repurchase program that will run through the end of 2018 in an additional step to assuage investor fears. 

Colorful, bright rendering of fiber optic cables.

Image source: Getty Images.

Now what

Acacia's travails demonstrate the risks that are often masked in young, fast-growing companies that rely on a few large customers to propel their expansion. Yet the organization may well weather this adversity. Acacia revealed that in the first quarter of 2018, ZTE accounted for only 20.4% of revenue, underscoring management's implication that the company may rebound more quickly than investors expect.

Asit Sharma has no position in any of the stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.

Invest Smarter with The Motley Fool

Join Over 1 Million Premium Members Receiving…

  • New Stock Picks Each Month
  • Detailed Analysis of Companies
  • Model Portfolios
  • Live Streaming During Market Hours
  • And Much More
Get Started Now

Stocks Mentioned

Acacia Communications Stock Quote
Acacia Communications
ZTE Corp ADR Stock Quote

*Average returns of all recommendations since inception. Cost basis and return based on previous market day close.

Related Articles

Motley Fool Returns

Motley Fool Stock Advisor

Market-beating stocks from our award-winning analyst team.

Stock Advisor Returns
S&P 500 Returns

Calculated by average return of all stock recommendations since inception of the Stock Advisor service in February of 2002. Returns as of 10/07/2022.

Discounted offers are only available to new members. Stock Advisor list price is $199 per year.

Premium Investing Services

Invest better with The Motley Fool. Get stock recommendations, portfolio guidance, and more from The Motley Fool's premium services.