NVEC - NVE Corporation: Needs To Increase Sales And Production Capacity In 2024

2024-01-19 23:17:07 ET

Summary

• NVE Corporation achieved high marginal growth in Q3 2024 with net margins increasing to 62% and almost zero debt.
• NVEC is advancing sensor architecture with electric fields, improving computing and memory, and upgrading isolation technology.
• Despite a drop in revenue, NVEC is attracting new customers, growing its patented technology, and has a fair valuation.

Innovation has been at the center of NVE Corporation’s ( NVEC ) brand since its founding in 1989. Its main product lines have consisted of spintronic sensors and electrical couplers which have undergone rapid development over the years with shifting market dynamics in nanotechnology. The company realized high marginal growth in Q3 2024 after its net margins grew to 62% from 59.70% in the prior quarter against gross margins that took up 80% of the revenue. What remains outstanding is that it achieved this with an almost zero debt portfolio into the new year.

Thesis

NVEC is building a new frontier for sensor architecture by using electric fields to control magnetism, harness energy, advance computing and improve memory. The company also upgraded its isolation technology thereby extending its isolation lead, a first in the market. In terms of order flow, NVEC seems to have overcome the supply shortages that plagued the semiconductor industry by deploying an integrated production process.

New technology

I believe NVEC is poised to increase its advantage in spintronics by constantly developing devices with greater speed, performance, and lower consumption of power and voltages. We are talking of advancements in quantum/ neuromorphic computing and nanotechnology at large that are almost rendering conventional systems such as disk drives almost obsolete.

For example, NVEC recently upgraded its V-series isolators from 6 KV isolators to 7 KV isolators (digital-to-analog converter) for isolated output. NVEC explains that the “V-series isolators are 100% tested to a jolt-worthy 7.2 kVrms (more than 10 kV peak), and to a best-in-class 1000 Vrms Working Voltage (line voltage).” So, we are looking at an upgrade process with the 7 kV isolators with “greater barrier resistance”- a groundbreaking barrier life of 44,000 years- almost unlimited.

In its Q3 2024 earnings report , NVEC stated that its sales also included transceivers with a novel "extended temperature isolated network and ultra-high isolation data couplers.” These devices will form a new frontier in the Internet of Things (IoT) industry as well as in new modules of power conversion. Of course, with the overall explosion of spintronics, NVEC will continue to increase its steady growth every quarter in line with the evolution of the semiconductor industry.

Revenue and cost adjustments

While NVEC’s revenue of $6.76 million in Q3 2024 indicated a drop of 5.3% (QoQ), it managed to lower its cost of sales by 15.3% (QoQ) at $1.4 million. The company also recorded an almost negligible debt of $0.4 million against a cash balance of $14.2 million. Further, while NVEC’s R&D expenses were stable at $0.7 million, the company recorded that part of its revenue came from R&D with a new customer-funded contract. The company has maintained its relationship with customers such as Pacesetter (a subsidiary of Abbott Laboratories), Sanova AG, and Digi-Key Corp which are primary users of spintronic sensors and IsoLoop couplers.

Risk Factors

Low capacity

I believe NVEC is yet to run to its full capacity as compared to other semiconductor companies. While making advancements in nanotechnology, it still has a lower product mix and fewer customers to spur growth. However, the distinctiveness of its technology coupled with its low-cost structure will help it grow in the long term. It also explained that it is working on reducing the lead times within a lower cost-structure framework. Already, the company is attracting new customers that are essential for its growth network even as it seeks to augment its overall capacity.

Of special note also, is that NVEC is growing its patented giant magnetoresistance ((GMR)) isolation technology, and we are likely to see additional performance enhancements. This world-class system is devoid of radio-frequency carriers even as the globe moves towards an era of no radiated emissions.

Adverse market dynamics

NVEC’s low product sales in Q3 2024 were attributed to a considerable downturn both in the semiconductor industry as a whole (in 2023) and the defense segment. This decline led to a 22.9% (YoY) drop in its net income. Still, the company has a chance to maximize its license revenue through partnerships from its patented GMR and magnetoresistive random-access memory (MRAM) technology that has a growing application worldwide. Companies such as Everspin boast a customer base of almost 2,000 with its MRAM devices used in critical aerospace machines, and medical technology.

Dividend Yield

NVEC declared a $1 per share quarterly dividend with a forward yield of 5.65%. Over the past 5 years, the growth rate has been 0%. Despite the constant rate, the yield is slightly higher than the US inflation rate of 3.4%. Still, the company needs to grow its revenue opportunities and raise the dividend yield in the long run.

Valuation

NVEC is trading at a P/E ratio of 15.84X against the industry average of 27.41X. This metric indicates a difference of -41.58% implying a fair valuation to the stock. It is slightly undervalued and we may see an upside as it seeks to grow its revenue into 2025. Noteworthy is that the spintronics device market is expected to reach a valuation of $35.97 billion by 2029 up from $5 billion in 2022 (a CAGR of 32.3%- within the forecast period). This is a considerable market size to be taken over by NVEC.

Bottom Line

I would rate NVEC as a hold while observing the growth of the spintronics market and the company's leveling of its capacity in 2024. Also, it has a fair valuation against the industry average indicating better progress into the future considering it has maintained low debt levels in its balance sheet.

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