2023-12-13 04:20:43 ET
Summary
- Luna Innovations announced a rise in revenue for Q3 FY23, driven by strong performance in its communications test business and high demand for its ODiSI sensing product.
- Despite a drop in net income and margins, the company's solid demand and signs of recovery in inflation and supply chain challenges suggest potential for future growth.
- The stock price of LUNA is currently in a downtrend but has formed a base around the $6 level, limiting downside risk. The company's valuation is also relatively cheap.
Luna Innovations ( LUNA ) offers fiber optic test and control products. I last wrote about LUNA in March, mentioning that the technical chart looks weak. Since then, it has corrected about 7%, and currently, there is a lot of fear about LUNA in the market. Although I believe the worst might be behind us, one should not panic and continue to hold LUNA.
Financial Analysis
It announced Q3 FY23 results . The revenue for Q3 FY23 was $30.7 million, a rise of 5.3% compared to Q3 FY22. The main reason for the rise was a strong performance in its communications test business and high demand for its ODiSI sensing product. The revenue from the communications test business grew by 26% in Q3 FY23 compared to Q3 FY22. The ODiSI sensing product sales grew 72% in Q3 FY23 compared to Q3 FY22. A rebound in sales to its defense customers and a large infrastructure project helped it to boost its sales. Its gross margin for Q3 FY23 was 57.4%, which was 58% in Q3 FY22. The drop in margin was mainly due to product mix.
The net income for Q3 FY23 was $0.5 million, which was $1.2 million in Q3 FY22. Although the margins and the income dropped in the quarter, I still believe the results were decent. They were able to grow their revenues in times when they were facing supply chain challenges and high inflationary pressures. I think it is just a matter of time before we see LUNA performing better than this in terms of revenue growth and margin expansion. The demand they are experiencing is solid, and it can be seen in the orders they have received in recent times. To name a few, orders from the energy company of UAE for DAS and DTS systems, OBR 6200 , and fiber-optic monitoring systems. So, the demand is solid, and talking about the headwinds, there are some signs of recovery. Inflation has been slowing down in the U.S., and the supply chain challenges aren't as severe as they were a couple of months back. So even though the current results aren't strong, I believe they might perform well in the coming quarters.
Technical Analysis
It is trading at $6.2. The price chart of LUNA is bearish, and the stock price is below its 200 ema, which shows that this stock is in a downtrend. But in my opinion, there are some positives even in these tough times. I think the downside risk is not much in the case of LUNA because a couple of factors limit the downside. First, it looks like the stock has formed a base around the $6 level. After falling for about three months, the stock price stopped falling, and it started to trade in a range of $5.5-$6.5. It has been consolidating in this range for about three months, and I believe it has formed a base because the stock took support from the same level in April when the stock price was falling continuously. So, there is a high chance that the stock might continue to consolidate in this range for some time and then give a breakout. But anything can happen, and imagine if the stock breaks down below the $5.5 level. Even then, I believe the downside is limited because immediately after the $5.5 level, there is a strong support zone for the stock at $4.6. Hence, I believe one should continue to hold the stock.
Should One Invest In LUNA?
The company is facing some headwinds, like supply chain challenges and inflationary pressures, which I believe are limiting its growth. However, my outlook for LUNA is positive; the demand it is experiencing is strong, and once these headwinds start to abate, we might see better results. In addition, its valuation looks cheap. LUNA has a P/E [FWD] ratio of 25.68x, which is lower than its five-year average of 38.69x. Given that the effects of macroeconomic headwinds have already been incorporated into the share price of LUNA, the valuation is low, and I think the worst is behind us. Since August, its share price has fallen about 30%, and I believe looking at the inflation slowing down, the downside risk in LUNA might be minimal. Hence, I assign a hold rating.
Risk
Their business is currently facing, and likely will continue to face, the overall effects of inflationary market pressures, especially in relation to labor and material costs. Due to the current labor shortage and inflationary environment, they are facing pressure on labor prices and materials. This has led to increasing competition for skilled personnel and wage inflation. As companies grow their operations and volume of work, their labor, fuel, and supplies costs may increase further. These cost increases have negatively impacted their profitability and cash flows, and they may not be able to fully offset them with contract pricing adjustments. In light of governmental and central bank efforts to reduce inflation, inflationary pressures and associated recessionary fears may also create uncertainty for their clients and adversely affect the level of project activity, which may negatively impact their cash flows and profitability.
Bottom Line
Even though its margins and profitability have taken a hit, I believe the worst might be behind us. It is experiencing strong demand, and the headwinds have started to abate. So I believe it might perform better in the coming times. In addition, its share price is near a strong support zone. Hence, I assign a hold rating on LUNA.
For further details see:
Luna Innovations: The Worst Seems To Be Behind