The photo associated with this article shows the Arnhem John Frost bridge in the Netherlands, which became really famous with the 1977 epic film, A Bridge Too Far, which depicted the tragic and overreaching allied scheme, Operation Market Garden, in September 1944 to end the war in the European theater by Christmas. Of course, when it comes to Acacia Communications overextending itself with the second public offering, we are not talking about the loss of lives, but with the comparatively unimportant matter of making money. In actuality, with the Street’s poor reaction to what we referred to as “gall” in a previous post, may have prevented a more precipitous drop in the valuations of not only Acacia, but potentially other publicly-owned optical component vendors as well, which has occurred with the very recent, less than stellar, quarterly performance by ZTE (a large customer of Acacia).
Although as always, we do not recommend stocks or securities, our discussions with financial analysts prior to the bad news coming out of ZTE have been quite interesting, if not revealing. The most ironic aspect of these interactions was the insistence on very specific fundamentals for why Acacia should not warrant anything approaching the ridiculously high market caps, when this same level of scrutiny was ignored on the way up.
Naturally, these investors can easily find more than enough ignorant consultants, or just those willing to sell their souls, in overemphasizing the importance of Acacia’s truly unique DSP product line. In addition, there is also a total lack of inhibition with some of these advisors to the Street to either prostitute themselves when it comes to favoring a company, such as Acacia, or to support that firm by promoting obscenely high expectations for the speedy and widespread arrival of next-generation technology, including 400G.
One of the biggest concerns in the investment community was over competitors potentially overtaking Acacia. With the financial windfall, it will be difficult for vendors such as ClariPhy Communications and NTT Electronics (NEL), to catch up. However, the expected, short term arrival of Huawei Technologies, into a separate optical components business (addressed in our daily updates over three weeks ago) could pose the biggest threat to Acacia.
Another big impact will be developments inside the system houses, especially because it is so difficult to differentiate products when so many vendors are using or may potentially employ Acacia’s DSP device, particularly for data center interconnect products. Three examples include the following:
1. Nokia supports additional modulation techniques on its DSP chipset, as well as other advantages over the Acacia offerings.
2. We would not be surprised to see Ciena introduce WaveLogic 4 soon.
3. Obviously, Infinera is making a lot of noise about the development of its next-gen DSP.
Given the prominence of ZTE in the Chinese optical market, it may be a definite sign that the long-haul market growth spurt in China is starting to come to an end. Whenever it does occur, the industry can finally rid itself of the insane notion of the optical “super cycle” started by the folks in the financial community.
[written by Mark Lutkowitz]