Acacia Communications, Inc (NASDAQ:ACIA) Melts Up After Cisco Buyout Melts Down

Acacia Communications: A Component Worth More Than The Total

Acacia Communiciations, Inc (NASDAQ:ACIA) made big headlines a week or so ago when it terminated a take-over offer from Cisco (NASDAQ:CSCO). The deal was set to close within the current quarter but Acacia pulled the plugged stating Cisco hadn’t gotten proper approval from a key regulator. Cisco, on the other hand, thinks differently but it’s unlikely a deal will go through now. If it does, it would constitute a hostile takeover and mire the two in years of litigation. Oddly enough, shares of Acacia are rocketing higher despite a restraining order that has the deal in a holding pattern. The question now is whether this stock is a buy and it looks like it might be.

Acacia Communications Updates Guidance, Shares Move Higher

The merger news isn’t the only thing lifting the price of Acacia shares. The company released its preliminary calendar Q4 results a day after terminating the deal and the news is good. The company is expecting the next quarter and full-year revenue to be in-line with the consensus estimate but raised the target for earnings. The quarterly $0.88 to $0.97 and yearly $2.86 to $2.95 are both well above the current consensus implying a bit of unforeseen earnings leverage that will impact the bottom line for quarters to come.

According to Acacia CEO Murugesan Shanmugaraj there are 4 key factors that have helped Acacia to improve its position with its customers in the markets it serves over the past 18 months: First, Acacia has benefited from several industry trends that have driven an increased demand… second, it has strengthened its product portfolio... Third, the company has strengthened its relationships with existing customers and have expanded its customer base. Lastly, Acacia has continued to execute against its strategic goals.

The Analysts Like What They See In Acacia

The analyst’s love was flowing even before Acacia released its preliminary results. The first to chime in was Needham which reiterated with a hold. According to them, Acacia should win out in court and that a standalone price is closer to $100 to $105 based on the valuations within the peer group. Rosenblatt Securities upped its rating and price target on the stock following the Q4 update. The firm rates the stock a buy with a price target of $110. The consensus target is just over $100 and on the rise. Over the past 90 days, the consensus target has risen nearly 50%.

The outlook for revenue and earnings growth is robust. The company is well-positioned within the telecom market as a provider of infrastructure material for both existing and new networks. Revenue and earnings are both expected to grow at mid-teens CAGR over the next three years at least and those estimates are likely too low. Add in the fact the company is well-capitalized with a fortress balance sheet and there is a chance this company could invest in or buy additional growth as well.

Acacia Communications, Inc: The Analysts Consensus Is Too Low

Based on the technical picture, the analyst’s consensus price target is far too low. The stock, over the past two weeks and several months, has formed and confirmed a Rising Methods pattern that points to some additional upside over the coming quarter. The full pattern began in early July and is worth about $35. Projecting that to the $80 level where resistance was just shattered gives a target of $115 at least. With earnings growth in the forecast, guidance on the rise, and the analysts on board a retest of the all-time-high is not out of the question. If the litigation with Cisco ends favorably new all-time-highs might be set.