AVGO - Akoustis: I Hear Rapidly Growing Revenue From RF Disruption

2023-03-09 19:24:11 ET

Summary

• Akoustis' proprietary XBAW RF Filter Technology is disrupting RF front-end designs from smartphones to PCs to home networking.
• As a result, Q2 FY2023 revenue was +59% yoy. That followed Q1 FY23 sales that grew 195% yoy.
• The product-portfolio is growing and ongoing business development activity continues to be robust. AKTS is taking market share away from incumbent and previously entrenched suppliers.
• Investors who occasionally allocate capital to "speculative growth" opportunities might want to take a closer look at AKTS.

As explained in my previous articles on Akoustis Technology ( AKTS ), the company is disrupting the high-end RF Filter market with its patented line of XBAW RF filter solutions (see my Seeking Alpha articles here , here , and here ). At the end of last quarter, AKTS had 15 customers in production with production qualified XBAW components. Akoustis has a number of wide-open markets that are ripe for disruption. Some of the biggest market opportunities are in 5G smartphones, 5G infrastructure, Wi-Fi 6E, Automotive, and Timing Control. The flip-side of the coin is that AKTS is still unprofitable, and will likely need to more than double last quarter's revenue in order to become profitable. And that is why I label this company as a "speculative growth" opportunity. That is, in my opinion, AKTS stock represents a relatively high risk/reward opportunity.

Investment Thesis

For many years, companies like Broadcom ( AVGO ), Qorvo ( QRVO ), and Murata ( OTCPK:MRAAY ) have dominated the RF-filter market with technology that has been around for quite some time. Enter Akoustis with its patented XBAW technology. As described in my earlier articles, XBAW RF filters are optimized for the most stringent frequency selectivity requirements and are ideally matched for frequencies in the 1-7 GHz range. XBAW filters also offer superior adjacent frequency rejection. The result is a filter that has a smaller physical footprint with superior power efficiency.

What many investors may not understand is that when the quality of the front-end filtering is better, the downstream electronic signal processing circuitry gets simpler, less expensive, and less power hungry - all of which are critical design engineering considerations when it comes to optimizing the entire system design. Those engineers are likely already looking at AKTS's product line (or at least they should be). Anecdotally, I have a friend (name and company cannot be revealed) who is designing the front-end and system architecture for a PC chip-set that implements Wi-Fi 6E. He is currently investigating AKTS's XBAW filters.

A report by Market Research Future (available here ) indicates a global RF market that could reach $32+ billion by 2027 and grow by an estimated CAGR of 16%+ through 2027:

A slide from a recent AKTS presentation shows that the premium RF front-end filter market that AKTS is focusing on is fast growing and an estimated $6 billion slice of the total global premium RF filter market:

Earnings

As mentioned in the bullets, the Q2 FY2023 report indicated that the growth thesis supporting Akoustis is still fully intact. Highlights during the quarter included:

• Revenue of $5.9 million was up 59% yoy.
• Growth was driven by production ramps of XBAW RF filter solutions to multiple customers across diverse end markets such as Wi-Fi 6, Wi-Fi 6E, infrastructure, timing control, and automotive.
• Following recent qualification of AKTS's wafer-level-packages, the company received its first high-volume XBAW order from a tier-1 5G mobile device customer. This is a major and pivotal milestone that will likely lead to more tier-1 orders going forward. It could well be an inflection point for the company.
• Announced three new Wi-Fi 6E design wins for MU-MIMO architectures, bringing the total number of Wi-Fi design wins to 20.
• Sampled next generation 5.5 GHz and 6.5 GHz Wi-Fi 6E / 7 XBAW filters in chip-scale-packaging offering 4x smaller size compared to prior generations of Akoustis' parts and which offer superior out-of-band frequency rejection.

The company also stated in the release:

Akoustis continues to experience strong demand and a growing sales funnel for its Wi-Fi, 5G mobile and 5G infrastructure products, including CBRS XBAW ^® filters, as well as its new XBAW and RFMi resonator and oscillator products. During the December quarter, the company shipped multiple samples of its new 5G XBAW ^® wafers complete with its new, advanced wafer-level packaging ("WLP") technology. Akoustis continues to add new Wi-Fi design wins, many of which are expected to ramp into production in calendar 2023.

Going Forward

Akoustis will likely keep executing its strategic game plan: match state-of-the-art packaging technology with its expanding portfolio of RF filter designs across a broad range of markets (existing, new, and those expected in the future through its research with DARPA).

Note the Q2 release also mentioned a new development order for an ultra-high-band demonstrator for a network infrastructure multi-element array from a tier-1 OEM. That appears to have solid potential to turn into another high-volume tier-1 production order.

Meantime, AKTS keeps innovating to its technology roadmap - reporting that its XBAW patent portfolio has grown to 80 issued and licensed patents, plus 127 patents pending (as of January 27, 2023).

For Q3 FY23, the company has guided for sequential revenue growth of "20%-40% despite the ongoing macroeconomic challenges impacting the consumer electronics industry." The midpoint (30%) equates to revenue of $7.67 million. That compares to $4.6 million in Q3 of last year, which would be +67% on a yoy basis. Nice.

Risks

In January, AKTS closed a public offering of 12,545,454 shares of common stock at a price of $2.75/share for net proceeds of ~$32 million.

While that issuance is obviously dilutive to existing shareholders, it's important to note that Akoustis management participated in the offering with more than $1 million in aggregate investments. That included a $900,000 investment by Jeff Shealy - Akoustis' Founder and CEO.

Meantime, shareholders are likely hoping that funding from the CHIPs & Science Act will come through before any more share offerings are required to fund on-growing operations and the growth of its business - including capex related to production ramps, R&D, the commercialization of its technology, servicing its outstanding debt, and any potential strategic transactions (which heretofore have been primarily packaging related).

Summary and Conclusion

Although I'm under water in my personal position in AKTS stock, and was very tempted to take a loss at the end of last year, I decided to hang in there because the company has been executing well and keeps putting more products into production and ramping up revenue. More high-volume tier-1 production contract announcements appear to be in the company's near future.

AKTS is a "speculative growth" opportunity and has a relatively high risk/reward profile. It's a risk I'm willing to take. With a current market cap of only $275 million, cash of $46.6 million, and $43.2 million in debt, AKTS appears well positioned to continue its rapid growth, expand its market share, and - just perhaps - become a very attractive takeover target from one of the much bigger companies that dominate the RF Filter space, but are doing so with old and outdated technology. AKTS stock is a buy.

I'll end with a six-month price chart of AKTS stock and note that the stock is +32% YTD despite the headwinds of a higher interest rate environment and a current market that isn't overly friendly to companies that are not yet profitable:

The recent spike you see on the right hand of the chart was after the bullish Q2 earnings report. The pullback represents an excellent entry point for investors who expect the Q3 report to also be bullish and that AKTS will continue to ink more Tier-1 production contracts this year.

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