• Subscribe
  • Log In
  • Home
  • Daily Diary
  • Asset Class
    • U.S. Equity
    • Fixed Income
    • Global Equity
    • Commodities
    • Currencies
  • Sector
    • Basic Materials
    • Consumer Discretionary
    • Consumer Staples
    • Energy
    • Financial Services
    • Healthcare
    • Industrials
    • Real Estate
    • Technology
    • Telecom Services
    • Transportation
    • Utilities
  • Latest
    • Articles
    • Video
    • Columnist Conversations
    • Best Ideas
    • Stock of the Day
  • Street Notes
  • Authors
    • Doug Kass
    • Bruce Kamich
    • Jim Cramer
    • Jim "Rev Shark" DePorre
    • Helene Meisler
    • Jonathan Heller
    • - See All -
  • Options
  • RMPIA
  • Switch Product
    • Action Alerts PLUS
    • Quant Ratings
    • Real Money
    • Real Money Pro
    • Retirement
    • Stocks Under $10
    • TheStreet
    • Top Stocks
    • Trifecta Stocks
  1. Home
  2. / Investing
  3. / Technology

Momentum Will Return to My Top Stock Pick, Acacia, in 2017

I think ACIA's share price can reach $100 by summer.
By CHRIS LAUDANI Dec 30, 2016 | 06:00 AM EST
Stocks quotes in this article: ACIA, INFN, AMAT, FB

My top pick for 2017 is optical interconnect company Acacia Communications (ACIA) . I'm a huge believer in the coming optical super cycle and I think Acacia will be a leader.

Back in September, I thought investors should wait for the stock to cool down before buying. The shares were up 270% after the company's May IPO.

The stock took a beating during September and October, but I think the momentum will return as the company launches a slew of new products next year.

Acacia's shares have been hurt by news of another company in the sector. On Oct. 26, long-haul optical maker Infinera (INFN) reported a terrible third quarter, and gave lower guidance for the fourth quarter.

But Infinera has been having problems for a while; its second quarter was a mess too. Investors were hoping for revenue growth by the fourth quarter, but management said the turnaround would take longer and be more expensive than anyone had imagined. Disappointed, investors dumped the entire optical group.

The next day, Acacia was hit by a report that its largest customer, Chinese telecom giant ZTE Kangxon, issued cautious guidance. In the first half of 2016, ZTE accounted for 38% of Acacia's revenue. At the end of the quarter, ZTE accounted for 63% of revenue.

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 (DSP) 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.

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 is 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.

Earlier this month, the company's management started making the rounds of the investment community to talk about the company and the future of the optical business.

Management believe the company's CFP2-DCO PICs, which contain a digital signal processor on board, are light-years ahead of the competition. The company's highest speed product, the AC400, which can handle 400 GB, has been added to Action Alerts PLUS charity portfolio holding Facebook's (FB) Voyager Data Center Interconnect (DCI) initiative. Voyager is Facebook's attempt to lower the cost of constructing an all-optical data center. Facebook hopes "hyper scale" cloud vendors will adopt its designs. The hyper scale data centers are the fastest-growing part of the optical business.

As the CFP2-DCO, CFP2-ACO and the AC400 ramp into volume production in the first half of 2017, the company should begin to pick up more customers as the year progresses. Management indicated its newer parts have lead times as long as 16 weeks, which gives the company great visibility into earnings. In addition, it is no small task to design these parts into new products, and it can take as long as 18 months for new customers to start ordering parts.

In fiscal 2014, the company reported revenue of $146 million. I think it can report over $650 million in 2017 and $750 million the year after. Likewise, earnings should accelerate from $0.44 in 2014 to $4.20-$4.50 by 2018.

The optical sector is very risky and Acacia is no exception. The company operates on the bleeding edge of technology and there are few customers in the world that can consume these types of parts.

Right now, Chinese telecom ZTE Kangxon accounted for 63% of revenue, which makes the stock very risky. ZTE recently lower its guidance and the news hit ACIA. But I'm confident 2017 will be the year when the company will be able to broaden its customer base.

I don't think the shares will be in the doghouse too long. Tech momentum investors can't resist companies like Acacia and they will back once the company starts reporting blowout numbers again.

I think ACIA can reach $100 per share by summer.
Get an email alert each time I write an article for Real Money. Click the "+Follow" next to my byline to this article.

At the time of publication, Chris Laudani was long ACIA, although positions may change at any time.

TAGS: Investing | U.S. Equity | Technology | How-to | Markets | Stocks

More from Technology

Palantir Technologies Looks Toppy and Further Declines Are Possible

Bruce Kamich
Jan 21, 2021 11:06 AM EST

Stand aside from the long side.

Tech Gives Push to Market's Rotation

James "Rev Shark" DePorre
Jan 20, 2021 4:49 PM EST

Money moved back into big-cap technology names, thanks to strong positive reactions to earnings from Netflix.

Netflix's Post-Earnings Surge Might Bode Well for Microsoft, Facebook and Amazon

Eric Jhonsa
Jan 20, 2021 2:40 PM EST

The streaming giant's numbers and commentary were arguably just good, rather than amazing. But with its stock having underperformed for months, that's all that markets needed.

Nano Dimension's Cash Raising Could Lead to Some Intriguing Scenarios

Timothy Collins
Jan 19, 2021 12:15 PM EST

In four months, NNDM will have raised $1 billion in cash.

Cybersecurity Stocks that Lagged in 2020 Could Get Boost from SolarWinds Hack

Eric Jhonsa
Jan 16, 2021 8:00 AM EST

The hack stands to drive an uptick in corporate and government spending to protect both on-premise and cloud assets.

Real Money's message boards are strictly for the open exchange of investment ideas among registered users. Any discussions or subjects off that topic or that do not promote this goal will be removed at the discretion of the site's moderators. Abusive, insensitive or threatening comments will not be tolerated and will be deleted. Thank you for your cooperation. If you have questions, please contact us here.

Email

CANCEL
SUBMIT

Email sent

Thank you, your email to has been sent successfully.

DONE

Oops!

We're sorry. There was a problem trying to send your email to .
Please contact customer support to let us know.

DONE

Please Join or Log In to Email Our Authors.

Email Real Money's Wall Street Pros for further analysis and insight

Already a Subscriber? Login

Columnist Conversation

  • 11:16 AM EST CHRIS VERSACE

    Worst Stocks to Buy for the Biden Presidency

    Biden's take on the minimum wage, likely moves on ...
  • 08:35 AM EST GARY BERMAN

    Thursday Morning Fibocall for 1/21/2021

    SPX (Long-Term View) The 1/20/21 NEW high @ 3859...
  • 11:38 AM EST CHRIS VERSACE

    Best Stocks to Buy for the Biden Presidency

    President-elect Biden's massive stimulus plan, int...
  • See More

COLUMNIST TWEETS

  • A Twitter List by realmoney
About Privacy Terms of Use

© 1996-2021 TheStreet, Inc., 225 Liberty Street, 27th Floor, New York, NY 10281

Need Help? Contact Customer Service

Except as otherwise indicated, quotes are delayed. Quotes delayed at least 20 minutes for all exchanges. Market Data & Company fundamental data provided by FactSet. Earnings and ratings provided by Zacks. Mutual fund data provided by Valueline. ETF data provided by Lipper. Powered and implemented by FactSet Digital Solutions Group.

TheStreet Ratings updates stock ratings daily. However, if no rating change occurs, the data on this page does not update. The data does update after 90 days if no rating change occurs within that time period.

FactSet calculates the Market Cap for the basic symbol to include common shares only. Year-to-date mutual fund returns are calculated on a monthly basis by Value Line and posted mid-month.

Compare Brokers

Please Join or Log In to manage and receive alerts.

Follow Real Money's Wall Street Pros to receive real-time investing alerts

Already a Subscriber? Login