NVE Corporation (NASDAQ: NVEC) missed earnings expectations for the second quarter of FY24 and its stock price tumbled nearly 20% the day after. We have analyzed the various aspects of NVEC’s business, including the market and its financials, to assess them value and see if it’s a good time to invest.
Our analysis shows that NVEC is a leader in the spintronics industry with a strong history of innovation. The company has high profitability and a strong competitive advantage to exploit the huge growth potential in this area. We consider the earnings shortfall to be a temporary setback and are confident that NVEC is a promising investment opportunity with a price target of $90.
NVE Corporation is a company specializing in spintronics, a nanotechnology that uses the spin of electrons to create, store and transfer information. The company makes high-performance spintronics-based products such as sensors and connectors that can sense and transmit data. These products are used in various fields such as defense industry, healthcare, medicine and IoT. The company also licenses its spintronic MRAM technology, which is a type of memory that uses magnetic fields to store data.
NVE Corporation operates in various geographic regions around the world and their products are sold through a global network of distributors.
NVEC’s mission is to make spintronics practical by producing high-performance products, including sensors and connectors for data acquisition and transmission in a variety of applications.
The Spintronics market is projected to grow significantly in the coming years. The market size estimated at USD 1.09 billion in 2023 is expected to reach $5.15 billion by 2028grows at a CAGR of 36% (Source: Mordor Intelligence). Currently, the spintronics market is in its early stages, with a significant portion still heavily dependent on research and technological innovation.
The growth of the spintronics market is driven by several factors. The growing use of applications such as hard drives, digital electronics and sensors has led to the introduction of energy efficient chips and memory storage devices. Additionally, the adoption of spintronics devices is expected to dominate the electronic device market due to their superior performance and low power consumption (Source: Mordor Intelligence).
In recent years, spintronics has gained popularity in the microelectronics market. This is evident with the launch of a new type of magnetic memory – MRAMs (Magnetic Random Access Memory) from major players in the field such as Samsung, INTEL, TSMC and Global Foundries. Key players in the spintronics market include NVE, Everspin Technologies (MRAM), Crocus Technology, Avalanche Technology, and Synopsys (SNPS) (Source: Mordor Intelligence).
Business Strategy – Innovation and Technology Leadership
NVEC’s commitment to innovation and technology leadership is a cornerstone of its business strategy. NVEC’s pioneering work in this field has led to the development of innovative products that offer superior performance and efficiency. NVE Corporation owns more than 50 issued US patents and is protected by more than 100 patents issued, pending or licensed from others worldwide. This robust patent portfolio not only protects its technological advances, but also highlights the company’s continued investment in research and development.
The company’s commitment to innovation and technological leadership is also evident in the company’s financial results. NVEC (NVEC) provides some of the highest margins in the semiconductor industry. We believe these numbers highlight its product leadership and ability to command premium pricing. In particular, gross margin serves as an important indicator of NVEC’s strategic success.
NVEC’s second quarter results were disappointing. The company’s total revenue fell 33% compared to the same quarter last year. Total revenue decreased from $10.7 million to $7.12 million. NVEC management attributed this decrease to a difficult comparison to last year’s revenue (when product sales jumped 59%) and the continued decline in the semiconductor industry, which we believe is a valid explanation given market conditions.
As the chart above shows, NVEC’s earnings have been volatile in recent quarters. We think this is a normal pattern for small-cap companies with limited sales scale. NVEC’s sales still rely on several large contracts and their delivery cycles, which may affect revenue stability. However, in 2023 NVEC overall outperformed the semiconductor market, which contracted by double-digits year-over-year in 2023.
We think NVEC has done a great job of maintaining strong margins and growing cash flow despite the big drop in revenue. For the second quarter of 2024, NVEC reported a gross margin of 78%, indicative of stable and sustainable profitability. NVEC also reported an operating margin of 65%, demonstrating the company’s efficient management of operations and its ability to drive profitability above the industry average.
We view the company’s ability to maintain these high margin levels as evidence of its strategic commitment to innovation and technology leadership.
When we look at key valuation ratios, NVEC looks undervalued relative to the sector. The P/E, PEG and EV/EBITDA ratios are below the sector median, suggesting the company trades at a lower valuation than its peers.
We also conducted a discounted cash flow (DCF) analysis for NVEC. Using a 10% weighted average cost of capital (WACC) to discount, we forecast a low single-digit revenue growth of 3% for FY23. Thereafter, we expect revenue growth to pick up gradually to reach 20% by FY28. This revenue forecast is based on the company’s leadership position and expected growth forecast in the spintronics market (34% CAGR). Our model also assumes that the free cash flow (FCF) margin will gradually decrease from the current 43% due to future investments in growth and will converge more towards industry average FCFs.
We have also included a 5% compound annual growth rate (CAGR) of revenue as the final growth value after the 10-year period.
Based on our DCF calculations, the fair value of the business is approximately $437 million. This rating reveals significant upside potential for the stock, indicating a price target of $90.
We see the main risks to NVEC’s (NVEC) business as follows:
- Dependence on revenue from a few large customers: NVE disclosed in its 10-K filing that it has some major revenue dependencies on customers such as Abbott Laboratories. These customers may have expiring agreements, posing a potential risk to NVEC’s revenue stream if not renewed.
- Intense market competition: The spintronics industry is witnessing increased risk from competition, according to their 10-K filing, as more entities enter the market. These competitors could exert significant pricing pressure on NVEC and undermine its competitive advantage.
- Export or Trade Restriction: Part of NVEC’s revenue comes from Asia. Any export restrictions or trade bans imposed on China could significantly affect business.
NVE Corporation is a leading innovator in the spintronics market and a compelling investment opportunity. As a leader in spintronics technology, NVEC has a strong competitive advantage and tremendous growth potential in the spintronics market. Based on our analysis, we believe that NVEC is currently undervalued relative to its peers. Our DCF-based valuation indicates significant upside potential for NVEC, making it an attractive investment proposition.
We recommend a Buy rating on NVEC with a price target of $90.