Acacia Communications Investors 'Stuck With A Bad Hand,' Says Morgan Stanley

Acacia Communications, Inc. ACIA reported fourth-quarter results Thursday, with the top and bottom lines falling short of expectations on weakness in the optical telecom company's three end markets. 

The Analyst

Morgan Stanley's Meta Marshall maintains an Equal-weight rating on Acacia Communications' stock with a price target lowered from $40 to $37.

The Thesis

Acacia Communications' earnings report showed a continued deterioration in its three end markets: China, hyperscale and telecom, Marshall said in a Friday note. (See the analyst's track record here.)  

It's difficult for investors to get excited about any encouraging product road maps — including CFP2-DCO, AC1200 and 400ZR —that Acacia hopes will differentiate its business over the next two years, the analyst said. 

Eight Acacia customers account for 57 percent of total revenue, and outside of these eight customers, revenue growth was 7.5 percent in 2017, and 22 percent excluding China, Marshall said. This signals that the company's merchant road map is "still differentiated" in the market, she said.

"However, that value proposition is still not meaningful enough to counteract the sizable exposures ACIA has to large customers, who underspent in 2017, without signs of early improvement in [the first quarter of 2018]."

Exiting the earnings report, there is no reason to expect Acacia to report growth in 2018, the analyst said. But the bearish case on the stock does not yet apply, as it's based on a slowdown in China or DCI share loss persistsing if the company's AC1200 is late to the market, Marshall said. 

Acacia's outlook represents a "low point and should increase from here," the analyst said. But with no confidence in growth ahead, investors are "stuck with a bad hand for now."

Price Action

Shares of Acacia Communications hit a new 52-week low of $33.68 Friday morning and were last seen trading at $35.17, down nearly 16 percent.

Related Links:

Acacia Communications Q4 Earnings Preview

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