There’s an old Chinese proverb about business:
“A chair with only two legs falls over. Three legs are stable; four even better.”
It is used to describe supply and distribution channels. You do not want to be wholly dependent on a small group of customers or suppliers, otherwise the stability of your earnings is low.
Acacia Communications is a chair with two legs. Their stock is down more than -10% today after their second-largest customer which trades in Europe guided materially lower.
Traders are concerned following the weak guidance from their top customer also, the Chinese multinational telecom ZTE Corp. ZTE alone accounts for ~40% of Acacia’s business and guided weak late Wednesday evening.
Analysts are highlighting that, “~82% of Acacia’s business comes from its largest five customers.”
Stock in the optical/photonic industry are under heavy pressure amid the industry warnings; shares of OCLR, NPTN, LITE, AAOI, and FNSR are all trading lower.
Never afraid to catch a falling knife, Northland is out defending Acacia, saying their management strongly implied they were seeing supply constrains in the 100G cloud, and that ZTE commentary focused on wireless infrastructure which is different from Wireline/Optical infrastructure.
However the volatility in ACIA shares highlights the inherent risk investors face when investing in multinational corporations exposed to Europe and China. As their economies continue to be pressured by geopolitical conflict and lack of leadership, the companies who are exposed will be affected.
ACIA went public in May 2016 and the IPO is up over +150% since. The -10% performance today likely feels like a small speed bump to anyone who invested in this tech company early on.
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