Hi Andy,
As I promised I looked at Acacia. Here’s what I did: I reviewed your informative post, I read Bert’s deep dive, I read the last press release, and I lightly read through the conference call, and I looked at some of the commentary on Yahoo.
Some thoughts (I didn’t do an intense study, so excuse me if I make some minor errors here):
If a stock growing revenue at 100% is at a PE of 17, there’s likely a reason.
Just because it’s fallen from $120 to $54 doesn’t mean it can’t go lower, a lot lower.
This company has a few concentrated customers (five customers over 10% (!)) and if one customer is over 30% (as reported before), we are probably looking at 70 – 80% of their business with those five customers. It is at their mercy.
This is a highly competitive, cyclical, hardware business.
No recurring income. They make and sell hardware as demanded.
Business has exploded as the Chinese have built out their 100 system, but that inevitably reaches an end.
The last guidance for next quarter is not only down but hugely down.
I had a déjà vu sensation: Been there, done that – with Infinera, with Solar Edge, etc, etc. Don’t need to do it again.
Sorry,
Saul
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Hi Saul,
Thanks for your thoughts and you are right that much concentration in a few customers is concerning. I don’t blame you for staying out of it but I am going to keep studying them because I think a lot of money is going to be made in big data. I wouldn’t compare this company to Infinera though because Infinera makes their own products and ACIA makes products for more than 25 customers. What I find encouraging about that is they had 8 customers in 2011 and they have increased it to more than 25 customers. They increased their percentage of revenue from new customers from 14% in the Q1 2016 to 35% in Q4 2016. This shows they are diversifying at a fast rate. But it is concerning that they have four companies that give them over 10% of their revenue. In fact ZTE gives accounted for 32%(2016), 28%(2015), 35%(2014) and ADVA 26%(2016), 22% (2015), 23%(2014). It is encouraging that they have two new customers that are in the top 5 of customers.
While they expect revenue to drop next quarter to YoY growth of 28% to 35%, because one of their DCI customers (Some people suspect it is a company in Germany, while others are suspecting Adva Networks),but I agree that is a huge drop from 100% growth. But in the conference call they stated that they thought this would only be temporary. Still they non-Gaap income growth of 85% to 106% and this is on a P/E of 17. That is crazy. But you are right this could be very volatile and if they can’t grow their customer base ZTE could hurt them if the go on the ban list in the U.S… One more thing that is concerning and exciting at the same time though is what their CFO stated in the CC. They are ramping up a new module (CFP2-DCO) and they stated they will not be able to meet all the demand in Q1 2017.
I also want to address your statement about this company and Infinera. This company really is nothing like Infinera because Infinera is vertically integrated and makes the complete product. This company has people manufacturing their product and only makes the modules that provide the photonic light. Also Infinera’s pic is Indium Phosphide while Acacia’s Pic is silicon based. I am not sure what is the better technology nor what the difference between the two is yet. Also this company will sell their product to any company that develops or produces networking equipment. So that is a much better TAM than Infinera. Think about that because Anet, Cisco, Coriant, Adtran, Ciena, FB, Google, etc. could buy their product.
Finally, I am not trying to change your mind but getting my thoughts together. That is why I post to this board Saul and very few other boards anymore. I like for anyone to shoot holes in my ideas so I can see the problems. I was also listening to a podcast by David Gardner yesterday and he was talking about investing in different companies in other countries. He stated that while some people refused to invest in China his best investments have been Chinese companies.(Bidu, and a gaming company NTES ) I believe that was what Ant was trying to tell us also, so I am going to rethink my investing rules and take the time to understand each investment on its own idea. I can understand how you feel about INFN. It surprised me too. But lets deconstruct what happened to the company. It finally won the longhaul battle and I thought it would continue with the metro divisions also. But what happened is that Metro divisions decided they didn’t need the best product on the market, they could save money with the cheaper product (Ciena). I just installed 4 100 gig pipes last week, the data just keeps growing. 3 years ago Ciena’s flagship product had a 100 gig side module that needed 3 slots in the chasis. Now their flagship product takes 1 slot for the 100 gig module. When 5G gets here the cell towers are going to have to be closer together and be fed by 100 gig pipes. Right now they are being fed by anywhere from 50 meg to 400 meg pipes. So all of these companies are going to need the Photonic modules to provide the light between nodes. This is why I think Acacia can do well. Also Infinera was never even close to as profitable as this company. Even if Acacia stays at the profit level they will be at next quarter it should be a nice investment.
Thanks for your input it is well thought out as always.
Andy
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ANDY:
Thanks for your thoughts and you are right that much concentration in a few customers is concerning. I don’t blame you for staying out of it but I am going to keep studying them because I think a lot of money is going to be made in big data.
If you have studied ACIA and believe in what they are doing and how they do it then you probably should do it. You will either make money with it or lose money. If you make money–Make a LOT OF MONEY-If you lose money, lose as little as you can. Losing money will become a learning experience. I have had many learning experiences that taught me it’s better not to lose money. It’s also better to lose early in life and learn, than doing it later in life with less chance of recovery.
Regarding concentration—
I have stated here numerous times I run a concentrated portfolio. Others talk about “5 Baggers 10 Baggers” I can’t spend bags, I can only spend money. Every stock I have bought, I have bought with the goal (dream) that that company will make me $1M if they work out to my benefit. I’ve been fortunate to have had that happen twice for me I never would have reached those numbers if I didn’t add to them on the way up, and let them run (And of course drip distributions into additional shares/units if possible)
I believe it is more important how you handle the investment that you make that determines how much you will make on that investment
good luck
b&w
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B&W
If you have studied ACIA and believe in what they are doing and how they do it then you probably should do it. You will either make money with it or lose money. If you make money–Make a LOT OF MONEY-If you lose money, lose as little as you can. Losing money will become a learning experience. I have had many learning experiences that taught me it’s better not to lose money. It’s also better to lose early in life and learn, than doing it later in life with less chance of recovery.
Thanks for the encouragement. I have invested 5% of my portfolio in this so far with the recent drop. The more I read about the company the more I like it.
I have also invested in a Reit recently, thanks to your posts. The Reit I put my money into was CCP (Care Capital Properties), I bought into it when the dividend was above 9% and rents property to SNF’s, Skilled Nursing Facilities. They had a drop because people believe that people are going to be taken care of at home instead of nursing facilities. I highly doubt that everyone is going to be taken care of at home. SNF’s are cheaper than alot of other options. Anyway thought I would mention it to you.
Thanks,
Andy
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