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Oct 7, 2016

S3 BLACKLIGHT: Acacia Lockup Expiry May Trigger an Eruption of Short Selling

High speed fiber optic communications provider Acacia Communications Inc. (ACIA US) is up 337% since its IPO at $23 in May. Acacia recently reported 3rd quarter earnings which estimated revenues at $127-$131 million and EPS at $0.72-$0.81 which both beat consensus estimates. In addition, the firm also raised future earnings guidance. Acacia’s stock price is actually down 19% from its recent $123.44 year to date high because in addition to its positive revenues news they also announced a secondary offering of $450 million of which $325 million would come from existing long shareholders (VC’s own almost 60% of the stock) and $125 million from the firm.

Although Acacia has a $3.6 billion market cap their actual tradable float is less than $500 million, with only 4.9 million shares out of their 35.8 million shares outstanding transact able until their lockup expiration date of November 9th. Short interest, which has grown steadily since its IPO, has been artificially constricted due to the lack of borrowable shares. Short interest was $188 million by the end of August and is up 68%, to $315 million, since then.

Acacia’s short interest is now over 60% of its float but will not get much larger due to lack of borrow supply. This lack of supply and increased short demand has increased the cost of new borrows, which have been trading at 60% to 100% fee today. Existing borrows continue to get more expensive as well, with borrows going at 53% fee and rising. Rates will continue to rise quickly until supply gets a huge boost from November’s lockup expiration and the settlement of the $450 million secondary offering.

With short sellers in limbo, there will not be any significant sell pressure in ACIA for over a month. Any downtick in its stock price will reflect long shareholders trying to realize some of their profits and selling their positions into weak demand. There is a chance that the increased float after the lockup expires will eject an eruption of pent up short selling. The S3 Crowding Indicator, a measure of the magnitude of shorting activity relative to market cap and float, has had clusters of spike for the last three weeks as the last sizeable bit of ACIA borrows were taken down and its borrow rate rose due to lack of supply.

Acacia’s stock price is taking a hit today when shorts are sitting on the sidelines. It will be interesting to see whether there are enough buyers to offset the short selling deluge when the floodgates of borrow supply open in mid-November. If buyers switch seats with the shorts, and sit on the sidelines waiting for cheaper entry points, Acacia may be on path to a significant post-IPO correction.

For more information on the above analysis, please contact:
Ihor Dusaniwsky, Head of Research, S3 Partners, LLC     Ihor.Dusaniwsky@S3Partners.net

The information herein (some of which has been obtained from third party sources without verification) is believed by S3 Partners, LLC ('S3 Partners') to be reliable and accurate. Neither S3 Partners nor any of its affiliates makes any representation as to the accuracy or completeness of the information herein or accepts liability arising from its use. Prior to making any decisions based on the information herein, you should determine, without reliance upon S3 Partners, the economic risks and merits, as well as the legal, tax, accounting and investment consequences, of such decision.

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