Summary
- The stock has been trending higher for several months now, but a bad or good earnings report could shake things up.
- The next earnings report won’t be here for a few more weeks, but a leading competitor of NVMI has already provided clues as to what to expect.
- The numbers expected from NVMI seem to be out of whack compared to what others have reported, which does not bode well for NVMI.
- Trend followers may disagree, but standing on the sidelines looks best when expectations seem to be too high and in need of a correction.
Nova (NVMI), a supplier of process control tools for the semiconductor market, is looking to get back on track after incurring losses for much of last year. The stock has been trending higher in recent months, recouping some of the losses in the preceding months. However, the stock may have trouble getting past resistance, which is why the upcoming earnings report is important as it is likely to provide clues as to the outlook for FY2023. While the report won't be here for a few more weeks, a leading competitor of NVMI has already provided some insights as to what to expect. Why will be covered next.
The stock may be up against resistance
NVMI had a down year in 2022, but it is off to a good start in 2023 with the stock having gained 16.3% YTD. Furthermore, despite some ups and downs, the stock has generally trended higher in recent months. Note, for instance, how the lows, starting in October, are trending higher and can be connected to form an ascending trendline. In contrast, the lows in the preceding months headed down, which shows up in the form of a descending trendline. The chart below shows how the trend has turned in favor of NVMI.
Support as defined by the aforementioned ascending trendline is inching up, a positive sign for the bulls. However, the stock may have encountered resistance. If the recent highs are connected to form a trendline, then it appears the stock is up against this very trendline. It's probably no coincidence that the stock has stopped short of this trendline a couple of times already, suggesting resistance is keeping a lid on the stock.
Resistance can be overcome, but further gains could be harder to come by for the stock, unless of course there is some sort of catalyst that powers the stock through resistance. One possible near-term catalyst could come in the form of the upcoming quarterly report, which will not only include the final numbers for FY2022, but should also include the outlook for FY2023.
Why NVMI may be at a turning point
NVMI has greatly expanded in the last few years, but growth has also been slowing down. The chart below shows how NVMI posted the tenth consecutive sequential increase in quarterly revenue in Q3 FY2022, a streak of 10 quarters starting in Q2 FY2020. However, growth seems to be petering out according to the chart and could be in danger of reversing. Q4 FY2022 guidance from NVMI calls for a 2.1% sequential increase in revenue at the midpoint, but the low end of guidance leaves open the possibility of a contraction, which would end the current streak.
Consensus estimates expect GAAP EPS of $1.10 and non-GAAP EPS of $1.25 on revenue of $147.8M in Q4. In comparison, NVMI posted GAAP EPS of $1.10 and non-GAAP EPS of $1.24 on revenue of $143.9M in the preceding quarter, which is not that big a difference. Estimates predict NVMI will finish with non-GAAP EPS of $5.04 and revenue of $567M for all of FY2022.
On the other hand, estimates see these numbers declining to non-GAAP EPS of $3.78-4.46 and revenue of $520-567M in FY2023, which represent YoY declines of 11.5-25.0% and 0.0-8.3% respectively. Growth is in danger of stalling, if not reversing, although the extent has yet to be agreed upon. The upcoming report could shed some light on the matter as it should include NVMI's outlook for FY2023 that could provide a guide as to what to expect from NVMI in the new year.
NVMI vs. the competition
NVMI competes in the market for process control tools, but it's not the only one. NVMI has a range of competitors, but the main ones are KLA Corp ( KLAC ) and Onto Innovation ( ONTO ). The former is easily the market leader in the market for metrology and process control tools. The table below shows some of the multiples these three companies trade at.
NVMI | KLAC | ONTO | |
Market cap | $2.60B | $54.35B | $3.89B |
Enterprise value | $2.35B | $57.71B | $3.36B |
Revenue ("ttm") | $541.0M | $10,483.7M | $977.6M |
EBITDA | $157.4M | $4,575.2M | $295.4M |
Trailing GAAP P/E | 22.65 | 16.21 | 19.23 |
Forward GAAP P/E | 20.77 | 16.87 | 18.34 |
PEG ratio | 0.57 | 0.66 | 0.26 |
P/S | 4.80 | 5.44 | 3.99 |
P/B | 4.70 | 20.87 | 2.48 |
EV/sales | 4.35 | 5.50 | 3.44 |
Trailing EV/EBITDA | 14.94 | 12.61 | 11.39 |
Forward EV/EBITDA | 12.14 | 12.82 | 10.89 |
Source: Seeking Alpha
ONTO is best known for metrology, but it also competes in other markets. Nevertheless, an argument can be made that ONTO offers a better value than NVMI when it comes to valuations. ONTO is most comparable to NVMI, yet it is bigger, more profitable and comes with higher margins.
KLAC and ONTO had conflicting things to say
ONTO has yet to report on its December quarter, but KLAC released its latest quarterly numbers and guidance on January 26. In general, the market was disappointed in what KLAC had to say, which explains why the stock dropped 7% in response to the latest updates from KLAC. Guidance, for instance, predicted non-GAAP EPS of $4.52-5.92 on revenue of $2,200-2,500M, which implies sequential declines of 29.3% and 21.1% respectively at the midpoint. This was worse than expected. Some, for instance, had expected revenue to be flat to slightly down, similar to what some estimates believe is achievable for NVMI.
KLAC pointed to a number of drivers, including reduced capex spending by some of the biggest names in the industry. The wafer fab equipment market is thus expected to shrink by about 20%. At the same time, KLAC believes it is better positioned to handle a downturn due to, for instance, its heavy exposure to EUV and which is expected to stay robust. KLAC felt other companies would not be so fortunate.
More importantly, KLAC suggested the second half of 2023 could be worse than the first half. From the Q2 FY2023 earnings call:
"I'm not going to guide each of the quarters. It feels today like things are stronger likely in the first half. There's some investments at the very end of the year that could cause the December quarter to be stronger depending on the timing of the fab construction. And so there are some things in, I'll call it, in Q4 that could swing the quarter-to-quarter one way or the other. But as I said earlier, I think that the second half is likely lower than the first half, and I'll stick with that for now."
A transcript of the Q2 FY2023 earnings call can be found here .
Note that this appears to contradict ONTO's prediction that the first half would be the bottom, followed by a recovery in the second half. KLAC's statement is more recent than ONTO's, which could mean that it is a better reflection of the current state of affairs as its relates to the market for process tools. At the very least, the latest numbers suggest market conditions have worsened. From the Q3 FY2022 earnings call:
"We believe this will reduce the impact Onto Innovation of a projected 20% decline in global wafer fab equipment spending next year. At this level of global decline, we expect our revenue in 2023 to decline about 10% to 15%, including the negative impact of about $80 million from new restrictions on equipment sales to China.
Though still early we currently see the first half of 2023 will be the bottom followed by an incrementally stronger second half."
A transcript of the Q3 FY2022 earnings call can be found here .
It's also worth mentioning that KLAC still expects the market to grow in the long run, despite a downturn in the short term. There are many others who feel the same way. For instance, a recent report predicts the metrology market will grow by a CAGR of 6.6% in 2022-2028, from $7.55B in 2022 to $11.10B in 2028.
Investor takeaways
NVMI is currently in the midst of an uptrend with the stock having appreciated by about a third since the October low. In fact, the entire semiconductor sector has rallied. For instance, the iShares PHLX Semiconductor ETF ( SOXX ) has gained 23.8% YTD, even though it is still quite early in 2023. If the trend is what people value, then it is not hard to see why long NVMI looks appealing to some.
It may be tempting to be a part of the rally, but I am nonetheless neutral on NVMI. The existing trend may point to higher stock prices, but, at the same time, it's worth remembering that trends do not last forever. The stock has also jumped higher in a relatively short amount of time, which suggests the stock is probably due for a pullback, if not a full-blown correction.
Valuations also leave something to be desired. Multiples for NVMI are by no means unreasonable, but they don't compare all that well against some of its main competitors. An argument can be made that if one is willing to jump in at this stage of the rally in stocks, then one is better doing so with stocks that trade at lower multiples than the competition. NVMI is not it.
Finally, it's important not to lose track of the fact that NVMI is still faced with a slowing market for metrology, process and other inspection tools. NVMI's own quarterly numbers seem to be going flat and the streak of sequential growth is in danger of ending. NVMI is likely to call for a sequential decline in the top and the bottom line during its next guidance, but there seems to be disagreement as to the extent.
Consensus estimates expect non-GAAP EPS to decline by 11.5-25.0% and revenue by 0.0-8.3% YoY in FY2023. These numbers may or may not prove to be too optimistic. However, if the latest comments from KLAC are any indication, then the former looks more likely. The current projections suggest NVMI will outperform the competition, specifically KLAC and ONTO, and the WFE market as a whole.
This is not impossible, just very unlikely. The current consensus estimates look too high for NVMI with both KLAC and ONTO suggesting they see bigger declines. The odds favor a lowering of estimates once NVMI releases its latest outlook. This could slow down the current rally in the stock, if not propel the stock lower.
Bottom line, while there are legitimate reasons for long NVMI, there are also valid reasons not to go long. Current expectations, especially as it relates to FY2023 revenue and earnings, seem to be out of line with what competitors have reported. Odds are that that will have to be corrected and the market will be disappointed when NVMI reports next.
For further details see:
Nova: The Competition Sends Conflicting Signals