Big chunks of the Internet are connected by fiber optic cabling. Connecting the components that connect these "optical" networks is difficult and usually requires lasers. Acacia Communications (NASDAQ: ACIA) simplifies the process by putting these connections in silicon, like any other PC microprocessor.
The result is systems that operate at lower power, plug into the existing global network infrastructure easily, and yet still deliver the extraordinary speed required to serve a data-hungry world. But is the stock actually worth buying? I think so. Here are five reasons why.
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1. An attractive valuation
Acacia Communications has grown per-share earnings by more than 100% year over year in five of the past six quarters. The latest, Q2, went south thanks to a quality issue at a contract manufacturer. Shares of Acacia are down over 29% year to date -- yet the sell-off appears to be overdone.
Shares of Acacia trade for less than 15 times earnings at current levels. That's crazy, given the growth we've seen so far and the long-term potential for the business, highlighted recently by reports that China Mobile is making a big purchase of the company's silicon interconnect equipment for its network. Peer ZTE, which makes a lot of mobile phones that operate on China Mobile's telecom service, is already a huge Acacia customer, accounting for a third of the upstart's revenue.
2. Outperforming industry peers
Even at its worst, Acacia has better gross margin and net margin than any of its major competitors, including Oclaro (NASDAQ: OCLR), arguably the market leader. Here's how the two companies stack up in key areas as of the latest round of financial reports, according to data compiled by S&P Global Market Intelligence:
- Gross margin -- Acacia 45.3%, versus 39.1% for Oclaro
- EBITDA margin -- Acacia 23.9%, versus 23.4% for Oclaro
- Net margin -- Acacia 29.65%, versus 21.28% for Oclaro
3. Necessary technology
Have you seen how fast data consumption is growing? Between now and 2021, data consumption is expected to expand by 19.8% annually in the U.S. and 26.2% annually in China, according to a report from PwC Global. Those are staggering figures and help to explain the massive buildout of Internet infrastructure in these key economies. China has been developing an entirely new Internet backbone. Acacia, through ZTE and now, perhaps, China Mobile, is a key part of that effort.
4. Excellent, engaged management
At Oclaro, no founders still own a meaningful position in the stock. At Acacia, all three founders still have a stake. As a group, all of Acacia's key insiders still own over 11% of the shares outstanding. What's more, all three reviews of the company at Glassdoor rate the company positively, with all employees saying they approve of the job CEO Raj Shanmugaraj is doing and would recommend working at Acacia to a friend.
5. Catalytic growth opportunities
While Acacia's business is primarily driven by telecom build-out and long-haul connections between telecom networks, data centers, and other backbone pieces of the Internet, there's also a burgeoning business in what's known as data center interconnect, or DCI. The idea here is to create hyperfast optical connections inside major data centers so that more information flows freely and provides value to the companies that deal in huge volumes of data.
Acacia doesn't list its DCI customers, but it's not hard to imagine Amazon.com with Amazon Web Services, Apple with iCloud, and Facebook all needing Acacia components for custom servers connecting the pathways of their data centers. And even if they don't, there could be hundreds more global data-center operators that do have that need -- and Acacia is already well established as a global player. That alone could make the stock worth buying at today's prices. That there are three other good reasons should have you thinking seriously about adding Acacia Communications stock to your portfolio.
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