Fiber-optic equipment maker Acacia Communications (ACIA) has soared by some 270% since going public in May. Have investors have seen the light on the firm ... or is ACIA simply blinding them with science?
Let's check the stock out:
What Acacia Makes
Acacia's optical-interconnect products use special silicon photonic integrated circuits (or "silicon pics") that the company crams with a billion transistors that convert the light coming off of a fiber-optic cable into usable data. Acacia's silicon pics also include a whole series of low-power digital signal processors and all associated logic.
Acacia packs these silicon pics into 5-inch-by-7-inch cases that plug right into industry-standard backplanes, and because the company's pics do everything in silicon, they're crazy fast. These babies can chow down on a 100-gigabyte fiber-optic cable's output with ease. In fact, the company has even developed pics that can handle up to 400-gigabyte feeds, and ACIA is already working on a one-terabyte version.
Now, silicon has what engineers call an "indirect band gap," which means that when you apply an electrical current to the material, you get phonons (heat) rather than photons (light). That's a major bummer. Only exotic materials can handle photons, which has traditionally made optical components 10x to 100x more expensive than silicon components. Optical parts have also been extremely difficult to manufacture to date.
However, Acacia can make its silicon pics using traditional wafer-fab equipment like the kind made by Applied Materials (AMAT) . And while the optical interconnects of old (i.e., two years ago) needed lots of additional circuitry that took up space and power, Acacia and companies like it are creating integrated circuits that are essentially powered by light.
The ability to make silicon that can process light as easily as electrons is a major engineering achievement -- and one reason why ACIA's stock is already up some 270%.
Why Investors Like ACIA
Acacia's interconnects allow companies like Juniper Networks (JNPR) , Cisco (CSCO) and Ciena (CIEN) to save space, power and money when engineering their switches and routers. In fact, Juniper bought Aurrion -- one of Acacia's major competitors -- just last month. Aurrion has spent the past eight years trying to figure out how to create indium-phosphide-based optical transceivers.
As for Acacia, transmission speeds of 100, 200, 300 and 400 GB and an entire product line that can support metro, long-haul and sub-sea applications mean that the firm's products virtually sell themselves. That's why Acacia's revenues have grown from $77 million in 2013 to $239 million last year.
Acacia last month also reported second-quarter revenues that soared 101% to $116.2 million, substantially above analysts' $86 million estimates. Non-GAAP earnings rose to $0.77 per share, while management guided third-quarter revenues up another 90% to $120 million to $128 million.
Not All Is Rosy
But while all of the above sounds great, ACIA also has a few concerns.
First, Chinese telecom company ZTE Kangxon accounts for approximately 32% of the company's revenues, but the U.S. Commerce Department imposed export restrictions in March on Acacia's shipments to the firm.
ACIA appealed and won a temporary license that allowed the company to continue exporting to ZTE until June 30. But Acadia needs the Commerce Department to extend that, as China is in the midst of a 100-GB-optical building boom and can't get enough of the firm's parts.
China is building as many as 800,000 cellular base stations and needs tons of optical interconnects to hook everything up. So, any adverse decision by the U.S. government on Acacia's ability to export to China could crash the company's stock.
Also bear in mind that Acacia's IPO lockup period expires in November, which means the market could soon become inundated with additional shares as insiders cash out. The stock has gone parabolic since the IPO, so that could tease out a lot of shares. A potential flood of new shares on the market could hurt ACIA's price.
Lastly, while I'm a big believer that we're seeing an optical "super cycle," the business can be very lumpy and shareholders can get jostled around quite a bit.
The Bottom Line
Analysts expect Acacia's fiscal-2016 revenues to shoot up 87% to $448 million and forecast earnings per share to come in at $2.68. Wall Street also sees the company producing nearly $600 million in revenue next year.
Still, with the stock already up so aggressively, I'd recommend waiting for a pullback before committing any capital.
