QUIK - QuickLogic: The Semiconductor Stock To Watch

2023-11-09 10:36:05 ET

Summary

• QuickLogic Corp. has seen an 83% YTD stock price gain, potentially signaling a sustainable turnaround for the company.
• The company's financials have shown operating losses for multiple quarters, but recent expense controls and new contracts could lead to revenue growth and profitability.
• QuickLogic's expansion into the eFPGA market and its venture into artificial intelligence present market opportunities for the company's future growth.

Introduction

In the wake of the generative AI boom in recent months, semiconductor companies have been some of the main beneficiaries of the AI-driven momentum. QuickLogic Corporation (QUIK), a fabless semiconductor company specializing in low-power, customizable solutions for mobile and portable electronics, has notably recorded an impressive 83% YTD stock price gain. But this upward trend could just be a fluke, or it could be a harbinger of a sustainable turnaround this stock could see. In 2018, QUIK launched its AI platform, QuickAI, specifically designed for endpoint AI applications. As a result, QUIK is often categorized as an AI stock, akin to other semiconductor companies like NVIDIA ( NVDA ), Micron ( MU ), and AMD ( AMD ). This analysis delves into the latest developments regarding QuickLogic's products, contracts, and overall business activities, exploring how they might contribute to revenue growth and a positive change in the company's bottom line, and whether recent developments could lead to a brighter financial future.

QuickLogic Current Outlook

QuickLogic's financials, especially its bottom line, haven't shown impressive performance for several quarters. While the company makes a profit on the direct costs associated with producing or delivering its products or services, as it has reported gross profits for the last few quarters, the company has very high operating expenses in comparison to the sales it generates; this situation has resulted in an operating loss for multiple quarters. QUIK's operating expenses are composed mainly of SG&A and R&D expenses. QUIK's income statement has no record of non-operating income; hence, the operating loss directly impacts its bottom line, resulting in a net loss for multiple quarters.

Based on the analysis provided, QuickLogic faces two strategic options for possibly moving the needle of its bottom line. The first is to explore avenues for substantial revenue growth while keeping operating expenses in check. The second is to streamline and minimize operating costs to the barest minimum.

In the last earnings call for Q2 FY23 (held in August), the company management reported revenue of $2.9 million - a 28.7% YoY decline and a 26.9% decline over Q1's figure - which is presently not a good outlook for the company's top line. Total operating expenses didn't change much between Q1 and Q2, suggesting that QUIK has recently managed to keep its operating costs in check and expense patterns are becoming steady and predictable.

Non-GAAP operating expenses in Q2 '23 were approximately $2.9 million. The OpEx for Q2 was in line with our prior guidance due to continued discipline in expense controls. This is approximately flat with operating expenses of $2.9 million last quarter and $2.8 million in the second quarter a year ago.

Elias Nader, CFO (Q2 Earnings Call)

QuickLogic's CEO, Brian Faith, expressed confidence in new embedded FPGA (eFGPA) contracts the company had secured in Q2 and provided more optimistic guidance for Q3. Field-Programmable Gate Arrays (FPGAs) are semiconductor devices that can be reprogrammed or configured after manufacturing, allowing them to be customized for specific tasks or functions. eFPGAs are embedded directly within another semiconductor chip, such as a microcontroller or ASIC. They allow design flexibility and customization of chips even after they are shipped to customers.

I am pleased to share that this next phase with a total value of $15 million is now in place and will begin generating revenue this quarter with revenue extending into 2024… With the receipt of this new contract and new business and other end markets that we are rapidly converting from our sales funnel, we remain on track to grow total 2023 revenue by more than 30% over 2022. We also believe we will report non-GAAP profitability for Q3 and Q4 as well as non-GAAP earnings for the full year 2023.

Brian Faith, CEO (Q2 Earnings Call)

Since releasing its Q2 results, QuickLogic has announced more eFPGA contracts. The latest contract entails the use of QuickLogic's eFPGA solutions by an undisclosed prominent technology company for an eFPGA IP project on the GlobalFoundries 22FDX platform.

Earnings results for Q3 FY23 will be reported on Tuesday, Nov. 14, and I expect QuickLogic to report better results over Q2. The current pipeline of deals, as indicated by management in the Q2 earnings call, should help QUIK hit or beat consensus estimates in the upcoming Q3 earnings report. In a presentation made by the company's CEO, Brian Faith, at the recently-held Lytham Partners Fall Investor Conference, he stated that since July 2021 QuickLogic has announced $31 million in eFPGA contracts.

One of QuickLogic's products that has helped it gain eFGPA clients is Australis, released in 2021. Australis is QUIK's eFPGA IP generator which helps chip developers achieve faster time to market by providing tools (including open-source tools) and support to define and implement customized eFPGA IP for their projects.

FPGA has become mainstream in chip design and the demand for eFPGA tech has grown as it is being actively integrated into ASICs and other Systems on Chips (SoCs). Research by market research firm IMARC Group reported that the global eFPGA market size reached US$ 7.1 Billion in 2022, and the eFPGA market is expected to grow at a CAGR of 16.7% during 2023 - 2028, reaching $19.5 billion by 2028. QuickLogic is rightly positioned in this market to benefit from this projected growth. Increasing demand for AI inferencing and general-purpose IoT applications propels the eFPGA market growth. eFPGA is also applicable in 5G technology and in the military and aerospace SoCs.

QuickLogic's Acquisition of SensiML in 2019 and its venture into artificial intelligence through offering endpoint AI/ML solutions for enterprises to build intelligent IoT edge & endpoint applications presents another good market opportunity for the company. This segment of the company's business is also seeing expansion. At the Lytham Partners Conference, the company revealed that it has added and expanded partnerships with microcontroller companies who are integrating (or working on integrating) the SensiML toolkit into their products.

Valuation and Stock Price

While the current P/E metric is undefined because of net loss, consensus estimates an EPS of $0.14 for Q3, indicating that QuickLogic is expected to return to profitability. Forward Non-GAAP P/E of 118.75x is still very high in comparison to the sector median of 21.32x. The stock price is up about 83% YTD and has shown strong momentum in its 3M, 6M, and 9M price performance. If QUIK releases impressive earnings results next week and turns a profit, I believe the stock price will maintain momentum and could see steady price gains.

Takeaway

While estimates are positive and guidance from the last earnings calls was optimistic, Investors should bear in mind that there is still a possibility for QUIK not to meet consensus expectations in Q3. This is why I would recommend a hold for this stock. Investors who are concerned about the high Forward P/E can monitor the next earnings result before deciding whether the stock is worth the premium. This company also faces dilution risks as it occasionally raises funds through the issuance of its ordinary shares.

Based on the strong momentum the stock has displayed in the past year, I believe that investors who currently hold this stock in their portfolio can continue to benefit from its growth potential. Maintaining a hold position while closely watching future financial performance, particularly regarding the bottom line, and closely tracking the stock's ongoing momentum is a good strategy to make informed decisions about the stock's long-term prospects.

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