MRAM - Everspin Technologies: Not As Confident After Q2 Earnings (Rating Downgrade)

2023-08-03 16:46:38 ET

Summary

• Everspin Technologies reported Q2 earnings that beat estimates, with revenues of $15.7m and improved gross margins.
• The company is navigating the semiconductor slowdown with a healthy backlog and plans to expand its offerings in the STT-MRAM family.
• However, the company's revenue growth is not as robust as predicted, and the overall market outlook for MRAM adoption remains uncertain.
• Risk/reward after the rally is not as appealing as it was a few months back.

Investment Thesis

Everspin Technologies ( MRAM ) just reported 2 ^nd quarter ’23 earnings that beat consensus estimates. I will go through the most important numbers and will give my commentary on where the company is going and whether it is still a buy after rallying around 30% since my last article in May. Although the results were great, I am assigning a hold rating for now due to economic headwinds that we may still face in the next half a year or so, and the revenue growth for the family of products is not as robust as the predictions of the MRAM products outlook suggests.

Briefly on Results

Revenues came in at $15.7m, which was about its top-end guidance estimate, and an increase of 7% from the same quarter a year ago (6% q-o-q). To be honest, I was a little surprised that the company managed to pull off such growth. I thought that the negative sentiment in the semiconductor sector is going to be a bit harder on sales, but I am glad I was wrong.

I was also glad to hear that gross margins saw an improvement of 160bps over the previous quarter and came in flat compared to the same quarter a year ago. Net income came in at $3.9m compared to $0.8m just a quarter ago, which put basic EPS at $0.19 a share compared to just 4 cents last quarter and beating estimates by $0.11 a share. This beat can be attributed to the company receiving a one-time tax credit under the CARES Act, which made the beat quite impressive. If we take that out, then EPS is very similar to the same quarter last year.

In terms of segment performance Toggle and STT-MRAM performed slightly worse than in the previous quarter, coming in at $13.4m compared to Q1’s $13.8m, but performing slightly better than in the same quarter last year ($13.2m).

The Royalty, Licensing, and Patent segment, which came in at $2.3m compared to $1.1m the previous quarter is seeing a little bit of a revitalization, which I hope continues going forward.

Overall, a good beat when considering the one-time 2m tax credit from the CARES Act, but if we take that out, the company is still experiencing some economic headwinds associated with the negative sentiment in the semiconductor industry.

Outlook

On the earnings call , CEO Sanjeev Aggarwal mentioned that the company is navigating the slowdown successfully with a very healthy backlog that should provide revenue going into the 2 ^nd half of ’24. If this persists and increases as the negative sentiment in the sector eases, the company should see revenue growth substantially higher than what we are going to see in ’23, which is low single digits.

The company is continuing to expand its offerings in the xSPI family of STT-MRAM with the beginning of sampling products from 4 megabit to 16 megabit that were announced in Q4 ’22. Another positive for growth is that customers are looking for modifications on the product and the company is planning to release “ a family of xSPI STT-MRAM products with densities from 4 megabit to 128 megabit for the standard temperature operating range of minus 40C to 105C. This enables our customers in all segments to use these parts in harsher environmental conditions. Engineering samples are available now upon request and will be available in production volumes in Q4 of 2023.”

I am also very excited to hear that the STT-MRAM 1 gigabit discreet product to replace NOR Flash is still on schedule for 2024 tape-out and will be offered for engineering as samples.

In terms of the overall market outlook of semiconductors and MRAM within it, I don't feel very confident about how the company is performing quarterly. As I mentioned in my previous article , the MRAM sector is projected to grow at 37% CAGR for the next 5 years, but so far the company isn't seeing the same or even similar revenue growth and that is slightly concerning. I would like to see revenue growth returning to double digits or at least the guidance to improve significantly.

The semiconductor sector is still experiencing a lot of headwinds that it saw in the last year. I've covered many semiconductor stocks in the recent past and most of them do see the cyclicality turning positive sometime at the end of '23 and returning to robust growth in '24 and beyond but only time will tell.

MRAM products are still considered to be in a niche, and the future large-scale adoption of MRAM is still very uncertain.

Financial Performance and Valuation

The company, just like before, still has no debt and a very healthy amount of cash on hand, sitting at around $31m as of Q2 ’23. I think this is a great position to maintain going forward, especially if the negative sentiment persists longer than anticipated. With such financial health comes a little bit of inefficiencies in my opinion. The current ratio is very elevated and has increased even more since Q4 ’22, where it stood at around 4, now almost doubling this quarter. I would like to see the company being more aggressive with its assets, because anything over the current ratio of 2.0, I consider to be an inefficient use of assets.

EV/Sales and P/Sales bounced off their lows in October ’22 and have doubled since then, which are now at around the average over the last decade. That, in my opinion, isn’t good if you’re looking to start a position. With further economic headwinds still predicted, I could see further volatility in the share price, which could present a better opportunity to add/start a position.

With the GAAP P/E ratio sitting at 38.6 right now because of the stock price rallying over 50% in the last year, this gives me another indication that I would wait for a pullback or an improvement in EPS/revenues before jumping in. My preferred entry point would be at around 20 P/E ratio.

Closing Comments

I do believe in the products that the company makes and I see these becoming more relevant in the future, however, seeing that the market has rallied so much in the last half a year, coupled with a bit of uncertainty about how the semiconductor industry is going to perform for the remainder of the year and early '24, I think that this is not the best time of starting a position right now. The risk/reward is not up to my liking right now and so I stick to my previous fair value price of around $7 for a better risk/reward outcome in the long run.

If your cost basis is around $7 a share I would not look to add until it comes back down again or until EPS/ revenues, see dramatic improvements. The stock, in my opinion, is going to see a lot of volatility going forward as I believe the negative sentiment is still going to linger a little while longer. I will revisit the stock at the end of the year while setting a price alarm at around $7-$7.5 a share, at which I may initiate a position if my long thesis hasn’t changed for the worse.

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