2023-04-18 05:18:36 ET
Summary
- Nova has been riding the trend higher for months, which offers opportunities, but the trend could be at risk of coming to an end.
- NVMI is expected to outperform as its own FY2023 outlook calls for, but that could backfire if NVMI falls short of expectations.
- Multiples for NVMI are on the high side, whether in comparison to the sector or in comparison to the market leader.
- There is an argument to be made in favor of long NVMI, but there are risks out there that could turn it into a losing bet.
Nova ( NVMI ), a supplier of process control tools for the semiconductor market, is on a roll. For starters, NVMI has outperformed at a time when many semiconductor companies are seeing the effects of weakening demand due to an industry downturn, something that could last through 2023. In addition, the stock has been on an uptrend for the last six months, which is likely to draw interest from the momentum crowd. However, the stock has struggled in recent weeks and it is possible the uptrend may be broken. Why will be covered next. Read our previous coverage here.
The trend is pointing up
NVMI has reason to feel good. Growth, for instance, has been better than expected. In fact, NVMI has outgrown the sector, which has been dealing with demand weakness lately due to an industry downturn. NVMI is coming off a year in which revenue grew by 37% YoY in the past fiscal year. In contrast, the worldwide semiconductor market grew by just 3.3% YoY in 2022 according to the Semiconductor Industry Association . Note that this number is much less than what many forecasts were expecting in the early part of 2022. Some thought growth in the mid to high teens was possible .
The stock has also done well. The stock is up 17% YTD, which is better than most. The SPDR S&P 500 ETF ( SPY ), for instance, has gained 7.9% YTD in comparison. On the other hand, NVMI has not done as well as many other semiconductor stocks. The iShares Semiconductor ETF ( SOXX ), for instance, has gained 21.6% YTD.
Still, there is reason to believe the stock has further to go. The chart below shows how the stock has moved higher within an ascending channel, bounded by an upper trendline made of a series of higher highs and a lower trendline made of a series of higher lows. The upper and lower trendlines are moving up, in effect pushing the stock higher as both resistance and support levels move up.
It's therefore reasonable to assume the stock could go higher with the trend in its favor. However, while the trend remains intact, it's worth noting that the stock has struggled in recent weeks. The stock closed at $104.47 on March 31, not far removed from the 2023 high of $104.98 if intraday highs are included, but it has since declined to $95.55 as of Friday, April 14, which means the stock has lost 8.5% in the month of April.
Furthermore, the stock closed below the 50-day moving average on Friday by doing so, if only by the slimmest of margins of 0.05%. Note how the stock spent much of the past few weeks hugging the 50-day moving average, which held the stock up for a while. The stock could be getting ready for another stab at the lower ascending trendline, which marks the lower bound of the channel the stock has been in for the last six months.
If the stock gets there and support holds, bulls may want to add to their position since getting in on a stock close to support within an ascending channel makes for a good entry point. However, it's possible support could fail, which would allow the stock to break through the channel. Obviously, this would be interpreted as a bearish signal since it would serve as justification that the trend is no longer up and therefore reason to lighten up, if not to get out entirely.
Earnings are coming up
NVMI is scheduled to release its next earnings report in early May, which could shake things up. Keep in mind that strong quarterly earnings have been a contributing factor in the rise of the stock. If NVMI disappoints, the stock could be propelled lower. Alternatively, if NVMI surprises like it did last time, the rally could get another lease on life.
It's therefore worth mentioning that while NVMI did not issue specific guidance for the whole of FY2023, the outlook does see NVMI outperforming the industry in FY2023, as it did in FY2022. From the Q4 earnings call:
"Following three years of significant industry growth, we expect 2023 to be more volatile as customers adjust their capacity to meet a softer demand in some segments like PC, mobile and possibly others. They made these uncertainties Nova ended the fourth quarter with record backlog, which we anticipate will enable us to relatively outperform in 2023."
A transcript of the Q4 FY2022 earnings call can be found here .
Most industry forecasts expect the wafer fab equipment market to contract by around 20% in 2023. For instance, a recent forecast from SEMI predicts the equipment market will shrink by 22% YoY to $76B in 2023, down from $98B in 2022, which was a record high. SEMI does expect a fairly quick recovery with the market expected to grow by 21% YoY to $92B in 2024.
Accordingly, consensus estimates predict GAAP EPS of $0.89 and non-GAAP EPS of $1.05 on revenue of $130M in Q1 FY2023. These numbers are in line with what guidance from NVMI is calling for as shown in the table below.
Q1 FY2023 (guidance) | Q1 FY2022 | YoY (midpoint) | |
Revenue | $125-135M | $133.96M | (2.96%) |
GAAP EPS | $0.77-0.98 | $1.07 | (18.22%) |
Non-GAAP EPS | $0.93-1.14 | $1.30 | (20.38%) |
Source: NVMI Q4 FY2022 report
Note that the Q1 numbers are significantly worse than before. The table below show the numbers in some of the preceding quarters. For instance, NVMI posted GAAP EPS of $1.14 and non-GAAP EPS of $1.28 on revenue of $151.2M in Q4 FY2022, all much better than what is expected of Q1 FY2023. NVMI has entered a downturn after years of expansion.
(Unit: $1000, except for EPS) | |||||
(GAAP) | Q4 FY2022 | Q3 FY2022 | Q4 FY2021 | QoQ | YoY |
Revenue | 151,238 | 143,906 | 121,521 | 5.09% | 24.45% |
Gross margin | 55% | 57% | 56% | (200bps) | (100bps) |
Operating margin | 27% | 27% | 32% | - | (500bps) |
Operating income | 36,924 | 38,938 | 29,893 | (5.17%) | 23.52% |
Net income | 36,098 | 35,075 | 22,226 | 2.92% | 62.41% |
EPS | 1.14 | 1.10 | 0.73 | 3.64% | 56.16% |
(Non-GAAP) | |||||
Revenue | 151,238 | 143,906 | 121,521 | 5.09% | 24.45% |
Gross margin | 56% | 58% | 57% | (200bps) | (100bps) |
Operating margin | 31% | 31% | 34% | - | (300bps) |
Operating income | 42,016 | 44,716 | 35,123 | (6.04%) | 19.63% |
Net income | 40,778 | 39,698 | 32,752 | 2.72% | 24.51% |
EPS | 1.28 | 1.24 | 1.08 | 3.23% | 18.52% |
Source: NVMI Q4 FY2022 report
However, estimates do not expect the numbers to get much worse beyond Q1. Estimates expect NVMI to finish with non-GAAP EPS of $3.75-4.60 on revenue of $500-533M by the end of FY2023. These numbers represent YoY declines of 9.27-26.04% and 6.61-12.39% respectively. Remember that this would be significantly better than the equipment market as a whole, which is expected to contract by 20+% as mentioned earlier. Estimates see the numbers getting better with non-GAAP EPS of $4.50-5.88 on revenue of $570-633M in FY2024. The table below shows the numbers in the preceding years for comparison.
(Unit: $1000, except for EPS) | |||
(GAAP) | FY2022 | FY2021 | YoY |
Revenue | 570,729 | 416,113 | 37.16% |
Gross margin | 56% | 57% | (100bps) |
Operating margin | 26% | 27% | (100bps) |
Operating income | 149,931 | 112,386 | 33.41% |
Net income | 140,213 | 93,101 | 50.60% |
EPS | 4.40 | 3.12 | 41.03% |
(Non-GAAP) | |||
Revenue | 570,729 | 416,113 | 37.16% |
Gross margin | 58% | 58% | - |
Operating margin | 31% | 30% | 100bps |
Operating income | 178,578 | 126,331 | 41.36% |
Net income | 161,509 | 114,669 | 40.85% |
EPS | 5.07 | 3.85 | 31.69% |
Source: NVMI FY2022 annual report
Could there be a surprise in the offering for NVMI?
The consensus estimate is that NVMI will outperform at a time when the industry contracts due to a downturn. A lot is expected from NVMI during these tough times for the industry, but that raises the odds of NVMI failing to meet expectations. For instance, NVMI has yet to see much in the way of order cancellations, but that could change as 2023 goes by.
There is, for example, talk that TSMC ( TSM ), which is believed to be NVMI's top customer at 23% of FY2022 sales and will soon report earnings, intends to cut capex spending due to greater than expected weakness in demand for semiconductors. This falling demand has seen utilization rates drop in several key process nodes, including 6 and 7nm.
Another wild card could come in the form of China. China seems to have been the biggest contributor to growth in recent years as shown in the table below. China increased its share of NVMI sales by 900 basis points in FY2020-2022, way ahead of everyone else. This has helped NVMI, but that also means that NVMI stands to lose if China cuts back on orders, whether due to recent export rules by the U.S. government, the pulling forward of sales, the industry downturn or some other reason.
Sales by geographic region in percentage | FY2022 | FY2021 | FY2020 |
Taiwan | 32 | 37 | 33 |
China | 28 | 21 | 19 |
USA | 16 | 23 | 23 |
Korea | 13 | 11 | 17 |
Other | 11 | 8 | 8 |
Total | 100 | 100 | 100 |
Source: NVMI FY2022 annual report
NVMI may not offer the best value
Valuations may also be an issue for some. The table below shows some of the multiples NVMI trades at in comparison to KLA Corp ( KLAC ), the market leader in the market for metrology and process control tools. In general, NVMI trades at higher multiples than KLAC does, even though the latter is way bigger, has higher margins and is more profitable.
NVMI | KLAC | |
Market cap | $2.74B | $51.94B |
Enterprise value | $2.46B | $55.30B |
Revenue ("ttm") | $570.7M | $10,483.7M |
EBITDA | $167.6M | $4,575.2M |
Trailing non-GAAP P/E | 18.88 | 14.78 |
Forward non-GAAP P/E | 23.47 | 15.35 |
Trailing GAAP P/E | 21.72 | 15.49 |
Forward GAAP P/E | 27.83 | 16.12 |
PEG GAAP | 0.53 | 0.63 |
P/S | 4.80 | 5.20 |
P/B | 4.67 | 19.95 |
EV/sales | 4.31 | 5.27 |
Trailing EV/EBITDA | 14.68 | 12.09 |
Forward EV/EBITDA | 17.08 | 12.36 |
Source: Seeking Alpha
Investor takeaways
There is certainly reason to be long NVMI. NVMI has outperformed and it is expected to continue to do so in FY2023, despite the industry downturn. The stock is in an uptrend. Long NVMI has been a winning bet for the last six months. The trend is your friend as they say.
I am on the fence on this one, but I am neutral on NVMI nonetheless. There are a number of events coming up that have the potential to move the stock, whether it is the latest outlook from an industry bellwether like TSMC, NVMI's own earnings report or a possible breakdown in the charts. Some caution is warranted at this time.
The stock has done well recently, but it has only recouped some of the prior losses in Aug-Oct 2022. The stock still appears to be in a corrective phase following the peak in December 2021. Long NVMI may have been worthwhile for traders who know how to get in and out of a stock the past 16 months, but, for most investors, not so much. Anyone who got in at the peak is still nursing substantial losses, the recent rally notwithstanding.
Multiples are on the high side, whether in comparison to the sector or, more importantly, in comparison to the main competitor. Granted, a premium is warranted if NVMI manages to outgrow the market as it did in FY2022. But even here, NVMI could be vulnerable. NVMI may be forced to revise its FY2023 outlook if top customers in Taiwan and China cut back on equipment for whatever reason. The latter in particular could be a wildcard for NVMI since a lot could happen on that front with not much certainty to be had.
Bottom line, some may want to roll the dice on NVMI, while others may be more hesitant due to the risks inherent to NVMI. There is an argument to be made in favor of either side. Neither side has a clear edge. In situations where coming up with the winning bet is low, it may be better to not place bets at all.
For further details see:
Nova: Important Events Coming Up