Why Shares of Acacia Communications Surged 12% in August

9/8/17

By Timothy Green, MotleyFool

What happened

Shares of Acacia Communications (NASDAQ:ACIA), a provider of optical-transport and network-infrastructure equipment, jumped 11.6% in August, according to data provided by S&P Global Market Intelligence. News of a tender for optical components by China Mobile on Aug. 23 was the main catalyst, with investors hoping that a downturn in demand from China would finally be reversed.

So what

Acacia's second-quarter revenue tumbled 32% year over year, driven mostly by weak demand from China. The company did say that it was seeing improving order rates during the third quarter from some of its key customers, including its largest customer in China. Whether that will be enough to return the company to growth remains to be seen.

Data cables plugged into a server

IMAGE SOURCE: GETTY IMAGES.

The news of the China Mobile tender lit a fire under the stock, providing some evidence to suggest that the slowdown in China may be coming to an end. China Mobile is reportedly looking to buy between $300 million and $450 million of components from a variety of suppliers. It's not known how this deal will affect Acacia's results, but investors should learn more the next time Acacia reports its quarterly results, sometime in November.

Prior to the onset of weak demand, Acacia was growing at a breakneck pace. Revenue doubled in 2016 to $478 million, and the company managed a GAAP (generally accepted accounting principles) operating margin of nearly 25%. Profits tumbled along with revenue during the second quarter of this year, but the China Mobile tender provides some hope that the worst is over.

Now what

Shares of Acacia are still down about 64% from their all-time high, and it will likely take a return to robust revenue and earnings growth before the stock can make up all that lost ground. The stock now trades for about 24 times the average analyst estimate for adjusted earnings this year, but just 14 times 2016 adjusted earnings. For investors willing to bet that the current downturn in demand is temporary, Acacia is an interesting stock, offering both value and growth potential.

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