2023-09-06 15:16:41 ET
Summary
- Navitas Semiconductor Corporation is a pioneering company in next-generation power semiconductors, offering gallium nitride and silicon carbide semiconductors with potential to expand capacity.
- The company has a healthy balance sheet with no debt and a substantial net cash position of $171 million.
- Navitas is well-positioned to capture market leadership in GaN and SiC, with a broad portfolio of patents and over 75 million shipped devices already.
Investment thesis
Navitas Semiconductor Corporation ( NVTS ) is a pioneering company in next-generation power semiconductors. The surging demand for computing capacity means that the semiconductor industry will constantly need to innovate to adapt to the evolving landscape. Navitas offers the market gallium nitride and silicon carbide semiconductors, which have more potential to expand capacity than the legacy silicon ones. But the technology is relatively young, and it would be a long road to fully replace legacy solutions. But the potential addressable market is huge and Navitas is already in the advanced stage of this technology development and possesses a broad portfolio of patents. The stock is attractively valued despite this year's massive rally, making it a "Strong buy" for long-term investors.
Company information
Navitas designs, develops, and markets next-generation power semiconductors, including gallium nitride [GaN] power integrated circuits [ICs], silicon carbide [SiC], and associated high-speed silicon system controllers, and digital isolators used in power conversion and charging.
The company's fiscal year ends on December 31 as a sole operating segment. According to the latest 10-K report , Navitas generated three-fourths of total sales outside the U.S. Almost 40% of sales in FY 2022 were generated in China. In FY 2022, the four largest customers comprised 63% of total sales.
Financials
Navitas went public in October 2021 , so we have a short history of earnings and financial performance of the company. Navitas' revenue is compounding at the massive CAGR because of very low comps, and the operating margin is far below zero due to the small scale. A good sign is that, despite its small scale, the company has generated positive levered free cash flow [FCF] ex-stock-based compensation [ex-SBC] in FY 2022.
Author's calculations
Unsurprisingly, the company invests heavily in innovation. Navitas has an R&D to revenue ratio above 100%, and an SG&A to revenue ratio is even slightly higher. It is reasonable because the company needs to fuel revenue growth to achieve the scale sufficient to generate profits as soon as possible. The company has a healthy balance sheet with almost no debt and a substantial net cash position of $171 million. Given the fact that, in recent quarters, the company burned on average about $15 million per quarter, this cash position looks sufficient to operate over the next ten quarters, which is solid in my opinion.
Seeking Alpha
The latest quarterly earnings were released on August 14, when the company topped consensus estimates. Revenue demonstrated stellar growth momentum with a 110% YoY growth. The adjusted EPS improved slightly from -$0.07 to -$0.05. The operating margin has improved significantly YoY, from -232% to -150%, mainly due to significantly narrowed SG&A to revenue proportion.
The upcoming quarter's earnings are scheduled to be released on November 9. Quarterly revenue is expected at $21, which would be a 110% YoY growth again. The adjusted EPS is expected to improve slightly.
As we see from the company's small scale, Navitas Semiconductor is a potential investment for the long term. That said, we need to understand the prospects of the next-generation semiconductors with GaN ICs and their advantages over the existing technology. According to the company's latest 10-K report :
"with a GaN power IC, increased power system switching speeds and energy efficiency can be achieved, which translate into notable benefits for power electronics such as smaller size, lighter weight, higher density, faster charging, energy savings and ultimately a lower system cost."
I think these advantages over the existing technology are notable and make the company's products attractive for original equipment manufacturers [OEMs]. I am not a physicist and relatively far from science, but according to Yunyang Yuan from Nanjing University of Posts and Telecommunications, GaN ICs indeed have several advantages over traditional silicon ones. At the same time, there are some drawbacks as well, which need to be resolved to make GaN preferable from all points of view. That said, it is crucial for Navitas to sustain its focus on innovation and continue investing heavily in R&D. It is good that GaN and SiC have the potential to target diverse end markets, including data centers, smartphones, solar, EVs, and home appliances. That said, the potential total addressable market is vast.
Despite being a relatively small company with a quarterly revenue of about $20 million, Navitas is already a well-recognized player in the industry. According to the latest 10-K report, by March 2023, over 75 million Navitas GaN devices have been shipped, with failure rates of less than one part per million. The company has a broad portfolio of over 185 patents issued or pending, encompassing key aspects of GaN power circuitry, analog and digital integration, as well as SiC device design. Having such a wide portfolio of patents and 75 million shipped devices with GaN makes Navitas a strong pioneer in this nascent market. In industries with cutting-edge technologies, it is common when the pioneer takes it all, and Navitas looks well-positioned to capture market leadership in GaN and SiC.
Valuation
The stock surged more than 140% year-to-date, significantly outperforming the broader U.S. market and the iShares Semiconductor ETF ( SOXX ). Seeking Alpha Quant assigns the stock an average "C" valuation grade, indicating that the valuation is approximately fair. On the other hand, the main metric for the growth stocks, the forward price-to-sales ratio, is as high as 17.6.
Navitas is a very young growth company, so the discounted cash flow [DCF] simulation would be the most appropriate valuation approach. I use a high 15% WACC for discounting due to the high level of uncertainty. Consensus revenue estimates forecast substantial revenue growth over the next four years.
I expect revenue growth to decelerate as the business will grow. I expect revenue growth to decline five percentage points yearly starting from FY 2027. I use a 1.8% free cash flow ("FCF") margin for my base year and expect two percentage points yearly expansion.
According to my DCF valuation, the business should be worth $3.6 billion under the above assumptions. This indicates a massive upside potential for the stock to more than double in price. However, potential investors should consider that revenue growth and profitability expansion assumptions are very aggressive. Given the current stock price of $8.76, a 137% upside potential means that the fair stock price is about $20.
Risks to consider
The vast upside potential is impossible without comparable risks. Investing in young companies like Navitas is risky because of the short record of earnings and operating performance. The company is still far from generating operating profit, and the timing of becoming profitable is highly uncertain. That said, there is always a substantial risk that the company might never achieve operating profitability or the timing might be longer than expected by investors. The company's generous valuation is based on aggressive revenue growth expectations. If the company fails to achieve the expected growth, it will lead to a massive stock sell-off due to investors' disappointment.
A very high customer concentration risk is inherent to Navitas. The largest customer contributes more than 20% of the total sales, and the top four comprise more than 60%. That said, the company is highly dependent on its largest clients' financial performance and financial health. If the largest customers shift their priorities or cut spending budgets due to unfavorable economic circumstances, Navitas' earnings will suffer significantly.
Generating a substantial portion of its sales in China imposes significant geopolitical risks. Relationships between the two largest global economies are very complicated since the trade war, which started five years ago. Since then, geopolitical tensions have escalated, and recently, the U.S. government even banned some semiconductor companies from shipping some of their products to the Chinese market. That said, about 40% of the company's total sales face substantial geopolitical risks.
Bottom line
To conclude, Navitas is a "Strong buy" for investors ready to wait for multibagger growth over the long term. The probability of new technologies in the semiconductor industry replacing legacy silicon solutions is very high given the rapid growth of demand in computing capacity. GaN and SiC have multiple technological advantages over legacy technologies, making them well-positioned to capture the broad and large addressable market. Navitas Semiconductor Corporation, with its substantial experience in this nascent industry and about 185 existing and pending patents, is in a pole position in this potential massive bull run. The valuation is still very attractive, and the massive upside potential outweighs the potential risks and uncertainties.
For further details see:
Navitas Semiconductor: Don't Miss Out The New Semiconductor Star