2023-12-15 16:07:52 ET
Summary
- Navitas was ranked 72nd in Deloitte Technology Fast 500 after its revenue growth of 2,129% from 2019 to 2022.
- As revenues grew 115% in 3Q23, operating expenses grew only 26%, providing strong operating leverage as the company scales up.
- Navitas currently has $177 million of cash on its balance sheet and zero debt, which is expected to be sufficient for the company to reach operating breakeven.
- While the macro backdrop has been difficult for some of its markets like high-end consumer and solar, Navitas continues to displace legacy players and its customer pipeline continues to grow.
- The company has executed well as it expands its capacity with TSMC and X-FAB, while continuing to innovate and launch new products and technologies.
Navitas Semiconductor ( NVTS ) recently released 3Q23 results and has continued to show solid execution in its business.
To start off, Navitas was ranked 72nd in Deloitte Technology Fast 500.
This was the second year in which Navitas has been featured as the company achieved 2,129% growth in revenues from 2019 to 2022 as its GaN and silicon carbide technology has successfully displaced legacy silicon chips.
3Q23
Revenue came in at $22 million , up 115% from the prior year and 22% sequentially.
The main reason for the beat in revenues was due to the strong growth seen in the mobile market and the initial mass production for a major Tier 1 onboard charger customer.
Gross margins improved to 42.1% in 3Q23, increasing by 60 basis points sequentially and 370 basis points from the prior year.
This strength in gross margins highlights that the company is achieving excellent yields today. In fact, on the 3Q23 earnings call, management shared that the yields in 3Q23 were higher than its own internal targets and they believe it to be leading the industry.
Operating expenses came in at $17.9 million, with SG&A contributing $7.4 million and R&D contributing $10.5 million. Operating expenses grew 26% from the prior year, which is in-line with expectations.
In fact, we are seeing that Navitas is improving its operating leverage as revenue growth of 115% in the quarter far exceeds the operating expenses growth of 26%.
This is the Navitas model as the management team has been disciplined in investing its business in a sustainable manner as the revenue scales so that profitability will also improve.
For 3Q23, the loss of operations came in at $8.7 million, improving from the prior year's loss of $10.3 million.
In terms of the balance sheet, Navitas continues to have a very strong level of liquidity with the cash position being at $177 million. On top of that, it has zero debt on its balance sheet.
With just $17 million of cash used in operations for the first nine months of 2023, we can see that the current cash position can last Navitas almost eight years, and that is assuming the company does not improve margins any further from where it is today. That said, evidently there are huge opportunities for margins to improve further and cash flows from operations to turn to the positive territory.
In a high interest rate environment like today, given Navitas is a young and fast-growing company, it just shows how well run the company is as it does not need to rely on very expensive debt financing to grow and sustain its business.
Last but not least, when asked about management's sweet spot for cash on its balance sheet and the appetite for further acquisitions, the response certainly gives confidence in the way they are running the business.
The current cash on the balance sheet is sufficient to bring the business to breakeven operationally, and to move forward with capacity expansion which is needed for growth.
Beyond that, for acquisitions, given the company currently has no debt, it would then need to approach the capital markets by raising equity or debt tied to the acquisition transaction.
All in all, management seems comfortable with where their cash balance lies today and that is certainly positive for the business in the long-term given it is improving its efficiencies on working capital and capital expenditures.
Guidance
Navitas provided strong guidance and I liked that we continue to see strong operating leverage as revenue growth exceeds operating expenses growth by a huge margin.
For 4Q23, management expects revenues between $25 million and $26 million, which at the midpoint represents 106% growth from the prior year and 16% increase sequentially.
This is consistent with their guidance for the full year of 2023, growing 108% for the full year of 2023 compared to 2022.
The strength in the revenue guidance comes from the company's momentum in mobile, market share gains in EV onboard charging, as well as the expansion of silicon carbide capacity.
Gross margin for 4Q23 is expected to be between 42.2% and 42.8%, and at the midpoint, it represents 40 basis points improvement from 3Q23.
Non-GAAP operating expenses is expected to be $20 million, about 12% higher sequentially and 18% from the prior year.
As a result, for reference, we are seeing revenue grow 106% in 4Q23 at the midpoint, while operating expenses are expected to grow just 18%.
Thus, there continues to be significant leverage in Navitas business model.
Outlook for the business
On the 3Q23 call, management called out that macroeconomic factors were affecting some of its markets like the high-end consumer and solar markets.
That said, the management team continues to see strong leading indicators for its revenue growth for both the near-term and the long-term.
In particular, the Navitas pipeline continues to grow and reached a new high.
In addition, the company is entering the fourth quarter with very strong bookings and in fact, it is nearly fully booked as of the 3Q23 earnings call for 4Q23.
Thus, while we are seeing the macroeconomic environment, like high interest rates, affecting the broader markets, particularly in the solar and consumer markets, Navitas continues to outperform and grow faster than the average industry growth rates in each of its end markets as it continues to displace legacy players and technologies.
While Navitas did not provide an update, based on May 2023, its customer pipeline was at $760 million across markets.
Mobile
Navitas is doing really well in the mobile market.
In particular, during the 3Q23 earnings call, management called out to the strength that they are seeing from the China mobile market as major Chinese OEMs like Xiaomi and OPPO are growing the use of GaN in an increasing number of mobile chargers.
Navitas expects that about 30% of their mobile charger shipments in 2024 will use GaN and this is huge because it signifies a transition towards the technology in a big way, and that a huge opportunity remains for more penetration growth in the years after.
More specifically for Navitas, this also means that its customer's volumes do not need to increase for Navitas to see a huge jump in revenue. This because Navitas is still at a relatively low penetration rate even with one of its largest customers, Xiaomi and OPPO, and it just needs to displace legacy silicon players to show robust growth, so clearly, the runway is there.
In fact, Navitas announced that its GaN won a major program with the Samsung Galaxy S23 , among other models.
This win is already contributing to the company's 3Q23 and 4Q23 revenue ramp.
For Navitas to bag one of the largest smartphone players in the world just shows the strength of its product portfolio and technology, and the value proposition it brings to the table.
Also, given the Samsung win is new and in an early stage, this sets the stage for improving penetration within Samsung, and also sets the stage for more Korean or even US peers to transition towards GaN adoption.
Navitas has a new Gen 4 GaN that will continue to bring innovation within the mobile market, and it already has more than a dozen customers in development for it.
Solar and energy storage
While management did highlight that the solar and energy storage market is relatively soft as a result of macro factors that are affecting the entire industry, there are factors at play that are helping to offset these negative impacts.
For Navitas, the growth drivers within solar and energy storage remains firmly intact as we are still seeing the displacement of legacy silicon MOSFET and IGBT with GaN and silicon carbide, which Navitas specializes in.
This means that while the overall market may be soft in the near-term, the company is seeing some tailwinds from the market share gains from legacy technology and players.
As a result, Navitas continues to grow faster than the industry average within the solar and energy storage market and even in this soft macro backdrop, the company is still seeing that its customer pipeline continues to grow robustly.
The expectation for Navitas for the general solar market is that while it will continue to grow faster than the industry average in 2024 and after, they expect a recovery in the solar market in the second half of 2024.
That said, its customer pipeline and current activity that the company is seeing right now suggest that the customer momentum continues for the company in the near-term.
EVs
I think we are seeing a similar story for EVs given that across the industry, many OEMs are seeing weakness in demand in the near-term due to the high interest rate environment.
While there has been multiple OEMs that have provided weak or gloomy guidance, Navitas is showing that it can beat the trend within the EV space.
In fact, Navitas is seeing significant increases in its customer pipeline for onboard and roadside chargers.
The company continues to innovate and break boundaries as its EV system design center has just finished the development of a 6.6 kilowatt, 800-volt onboard charger platform that is expected to set all new industry benchmarks in system efficiency, density and cost.
Navitas is seeing significant customer interest in this new platform, and I expect business momentum to continue for the company given its very competitive new launches coming up and strong products in the portfolio.
Data centers
I do not need to emphasize how the rapid growth in generative AI has led to an equally strong demand for more power, higher energy efficiency and improved power density for data centers.
Navitas has the right products and technology for that as its system design center has a new 4.5-kilowatt AC to DC platform design, which not only offers energy efficiencies of more than 96% titanium plus standard, but it has also significantly improved in terms of power density when compared to even the best-in-class silicon designs.
What does this all mean?
This translates to strong growth in the number of projects in Navitas data center pipeline in the last quarter.
Appliance and industrial
As customers look to meet both energy efficiency regulatory requirements and the customer needs for power density improvements, Navitas has also seen the appliance and industrial customer pipeline grow significantly.
The reason for this is that major OEMs are beginning to start these GaN and silicon carbide programs to achieve the requirements and needs mentioned above.
And Navitas has the right product for each target market as its Gen-4 GaNSense ICs are application optimized and attractive for 100-to-1,000-watt home appliance applications, while the Gen-3 Fast silicon carbide and GaNSafe Power ICs targets the higher power industrial markets.
Capacity expansion
For Navitas, given that it has such strong demand and customer pipeline, the bottleneck for the business tends to be capacity.
The company needs to expand capacity quickly to meet the needs and requirements of its much larger customers.
Navitas has been able to do this very efficiently in an asset light manner given its fabless business model.
As a result, the company has been signing deals with multiple players to ensure that its capacity grows meaningfully in the near-term to medium-term compared to its backlog.
For reference, Navitas has guaranteed a capacity expansion with X-FAB to increase capacity for silicon carbide five times that of 2022 levels, while it is also expanding its GaN capacity with TSMC by tripling that from 2022 levels.
With Navitas securing capacity expansion, this paves the way for the backlog to be filled so that the lead times are kept as short as possible.
New technology platforms launched
One thing that keeps me positive about Navitas is its relentless focus on bringing innovation and new technologies to its current markets and new markets,
In the second half of 2023, Navitas is launching four major new technology platforms.
4 new technology platforms (Navitas)
Firstly, in 3Q23, Navitas launched GaNSafe, which brings GaN into high power and high reliability markets which it has not been able to penetrate thus far. As a result, with GaNSafe, this opens up new markets and applications like AI data centers, solar inverters, EV powertrains and traction drives that can now utilize GaN technology to improve reliability, power density, efficiency, charge faster and lower overall system costs. GaNSafe will be manufactured by Navitas long-term partner, TSMC. To be specific, GaNSafe has been engineered such that there are application specific features and functions to enable these markets that require high power and high reliability to utilize GaN technology.
Secondly, in 3Q23, Gen-3 Fast, which is a new generation of its GeneSiC technology, was also launched. According to the company, it has switching performance that is up to 50% higher than competition.
Along with GaNSafe power ICs, Gen-3 Fast silicon carbide is expected to be targeted at applications like electric vehicles, chargers, solar inverters, data centers and industrial applications in the 1-to-30-kilowatt range.
Thirdly, the company launched its Gen-4 GaNSense half-bridge ICs, which is meant to target ultra-fast chargers of 100 watts or more.
Lastly but perhaps most importantly, Navitas highlighted that it has achieved a breakthrough innovation it calls bidirectional GaN. These GaN ICs can operate efficiently and rapidly conducting and blocking currents in either direction. With this bidirectional GaN, it can replace four discrete power transistors, thereby reducing complexity, cost and also delivering the benefits of speed and efficiency that GaN brings.
This breakthrough is expected to contribute to improvements and advances in energy storage grid infrastructure, motor drives, amongst others.
Valuation
I have rolled forward the 5-year forward forecasts for Navitas.
At its 2021 investor day, management had a long-term gross margin target of 55%, and while I assume that management works their way to achieve this, the modeling assumes this is only achieved after 2028.
From 2024 to 2028, I assume a 5-year revenue CAGR of 60%, based on its customer pipeline of $760 million as of May 2023.
Assuming 10x P/S for 2024, my 1-year price target goes up to $9.50.
With an impressive 5-year revenue CAGR of 60% and near-term revenue growth at more than 100%, a 10x 2024 P/S is based on about 1x price to sales to growth ratio, which is justified for the company.
Conclusion
Navitas has showed us why it deserves to be in the portfolio despite being just a $1 billion company.
The company is not just successful in the mobile market, but it is increasingly seeing very strong traction in the solar, EV, data center and appliances and industrial end markets.
Within these individual end markets that Navitas is targeting, GaN and silicon carbide are just at the beginning of being adopted, with a long tailwind of transition to come as customers look to transition away from legacy technologies and move towards more GaN and silicon carbide which provides better power density, efficiency, faster charging, and improved cost profile, amongst others.
While there are other larger competitors in the field, Navitas has advantages which include a strong innovative product portfolio and rapid execution on capacity expansion, enabling a relatively small company to be able to compete in the market.
The customer profile and robust customer pipeline at Navitas also suggests that the company has a strong value proposition and that it is able to be in a favorable competitive position as it continues to scale.
On top of that, I have to give credit to the management team at Navitas for executing really well even in a difficult macro backdrop, steering the company in the right direction and preparing it for the huge growth to come in the coming years.
For further details see:
Navitas Semiconductor: Why I Remain Invested In The Company