Investors should’ve seen Acacia Communications’ collapse coming

The major averages may be having a strong week, but CNBC’s Jim Cramer also noticed a big collapse that needed to be addressed: the pain in the stock of Acacia Communications.

Shares of Acacia lost 35 percent of their value on Monday after the Commerce Department ruled to ban U.S. companies from selling components to Chinese phone equipment company ZTE for seven years.

“Here’s what drives me nuts about this story. We’ve known this was a risk all along, people,” the “Mad Money” host said on Wednesday.

Acacia, an optical networking equipment maker, came public in 2016. In 2017, the company got roughly 70 percent of its sales from just five companies, with nearly a third coming from ZTE.

Cramer pointed out that investors knew of President Donald Trump’splans to scale back on U.S. technology sales to China before Commerce Department made them official.

“Do not get me wrong, it is fine to speculate in high-risk stocks — you know I think that way, although I haven’t liked Acacia for quite some time — but if you’re going to take that kind of chance, at the very least, you need to be aware of the risks you’re facing,” Cramer said.

With that in mind, Cramer went over the warning signs he saw over the years that culminated in Acacia’s massive Monday drop.

The Commerce Department targeted ZTE for violating the terms of a sanction agreement by illegally shipping U.S. products to Iran, among other violations. The illegal shipping issue was already known when Acacia came public in 2016, Cramer said.

And while the ZTE restrictions sent most of the optical equipment stocks lower — shares of Oclaro sank 15 percent and shares of Finisardeclined 4 percent — none came close to Acacia’s 35 percent nosedive.

Cramer argued that the reason why Acacia’s stock got hit the hardest should’ve been obvious. In 2017, the company told investors in its annual report that it got 30 percent of its sales from ZTE.

In the section of Acacia’s report that addressed the risks it was facing, the company admitted that it relied “on a limited number of customers for a significant percentage of [its] revenue and the loss or temporary loss of a major customer for any reason could harm [its] financial condition.”

Acacia specifically named ZTE as its largest customer, explaining in the following paragraph that ZTE was already in some trouble with the Department of Commerce. Since 2016, Acacia only had a temporary licence to sell goods to ZTE, with no guarantee that the government wouldn’t eventually intervene.

“[Acacia] did everything short of sending you an engraved invitation warning you to save the date because the Commerce Department’s coming to ruin their business,” Cramer said. “People act surprised, but if investors in Acacia had done any homework, this news would not have come as a shock to them.”

Looking forward, Cramer suggested investors ask themselves three questions about companies with a lot of customer concentration: How much revenue comes from a single customer? Where is the customer based? Are there specific risks that could threaten the customer relationship?

Acacia is currently facing question number three, and for investors who own its stock, the “Mad Money” host said it was not the time to sell.

“I wouldn’t be a buyer here, but if you want to exit the position, I bet you’ll get a better chance to sell,” he said. “Let people calm down, let the shorts cover their positions, then head for the exits on a bounce.”

“The bottom line? Look, the blowup of Acacia Communications is unfortunate, but this Commerce Department ruling was something you could’ve seen coming if you’d read the annual report or even listened to me when I talked about this company in the past,” Cramer said. “This is why you always, always, always need to know the risks when you own a stock. Otherwise you’ll get pulverized, as shareholders in Acacia have learned the hard way.”