While Acacia Communications’ recent business performance has been impressive, and deserves to be rewarded, there can be no justification for a market cap that comes even close to exceeding the valuations of either Finisar or Ciena. With the limited number of tech IPOs, it appears that some institutional investors have constructed a mini-bubble based on just one optical company to quickly grab some profits before the economy in general is likely to take a steep nosedive. The IBD's 14-company Telecom-Fiber Optics industry group reached a 15-year high, of course, going back to the end of the last major bubble, after the financial community decided to treat the historically, conservatively-minded service providers, as if they would need bandwidth for an indefinite amount of time. The optical industry is still paying the price to this day for the results of overcapitalized vendors and network buildouts with overcapacity. It is precisely the reason why the current situation with Acacia, although with an overall impact extremely tiny in comparison, stings so much because of its reminder of the days when so many talented executives were forced to leave the industry, and more importantly, when people’s retirement savings took a massive hit as firms, such as Nortel, went down the tubes. At a minimum, the negative consequences this time will result in dramatically skewing the value assessments of Acacia’s competitors and other players in the space.
As we are believers in a free-market economy, there should be no prohibitions or penalties for what is essentially irrational exuberance, and in the final analysis, “buyer beware,” has to remain the key counterweight. Nevertheless, the lack of commentators from the Street maintaining a sense of adequate perspective on the optical market (even to the extent of ignoring the usual bias against it) will hopefully result in some soul-searching, perhaps even later in their lives. One can give up on the overwhelming bulk of supposedly objective industry analysts, who do not recommend stocks, and who have determined that their true calling is to be among the cheerleaders, as they are frustrated public relations executives.
Although it seemed as if the initial timing of the Acacia IPO at first was rather up in the air, given the legitimate uncertainties, the big investment firms ultimately could not have scheduled the entire process any better. They were obviously able to be convincing about the much lower, but still arguably excessive alternate entry price, which gave a big boost to today’s existing market cap. The coordination with the apparent availability of new Data Center Interconnect (DCI) products based on Acacia’s solution was right on the money.
The investment analysts, who came up with the “Optical Super Cycle” concept should maybe get some credit, despite these seven factors: 1) the potential for at least a little double counting in that there will be overlap between “China” and two of the trends, data comm/DCI and the public metro core; 2) the relatively modest impact at best on players other than Acacia; 3) the DCI segment is hard to quantify in terms of projections; 4) the public metro is always a drawn-out process; 5) Infinera stumbled badly with its forecast two days after the announcement of the model, which certainly did not surprise us; 6) massive build-outs supporting 5G wireless are hardly in the foreseeable future; and 7) that the "cycle could be 2-3x larger and longer than any previous one” is simply ludicrous on its face based on past trends in the market.
Concerning Acacia’s valuation being so out of line, while we have acknowledged its technology advantages particularly with DSPs, it is hardly “disruptive,” especially regarding cost with its silicon photonics – a point we have made about the technology as a whole in the past. The supplier is saying itself that it does not see going beyond 50% gross margins in the long term, which has been surpassed by optical chip manufacturers including Broadcom(/Avago) and Inphi. So, again, we believe one of the “Super Cycle” analysts in calling it “the [future] Broadcom of optical” is an exaggeration. In being a module company, it simply cannot reach the margins of a pure chip play.
Also, Acacia’s revenues are not even in the ballpark with those of Finisar and Ciena. Furthermore, Acacia’s growth levels are not sustainable beyond the very short term because the confluence of events somewhat uniquely benefiting the supplier, which have led to what we referred to even at a lower valuation last month as at "an obnoxious level since going public” will dramatically fall, partially as a result of changing macro conditions.
[written by Mark Lutkowitz]