1 week Ago
7postman/E+ via Getty Images Shares of Nova ( NASDAQ: NVMI ) have been holding up well during the recent volatility impacting the wider semiconductor sector. Somewhat of a hidden gem, as this was just a $2 stock in the 2000s, just a $20 stock as recent as 2019, after which shares have seen spectacular gains, having traded near a high around $250 earlier this summer. This made that shares have been fully discovered by the market, as the consistent and impressive growth performance has been noted by investors, including a renewed momentum surge in recent times.
On Nova Nova describes itself as an innovator and key provider of dimensional, materials, and chemical metrology solutions, used in advanced process control in semiconductor manufacturing. The company’s metrology solutions are based on multiple advanced technologies. These include Optical Scatterometry, x-ray photoelectron spectroscopy, x-ray fluorescence, SIMS, Raman, Titration, among others.
These solutions have been key for its semiconductor manufacturing clients and have stood at the basis of impressive operational growth over the past decade. Over this ten-year time window, the company has quadrupled sales to half a billion, all while operating margins have risen from about ten percent of sales to about 30% of sales. With no (significant) dilution incurred, earnings per share have ten-folded of this time period, driving the shares up, and delivering on handsome returns to investors.
2023 - Cooling Down After posting 55% revenue growth in 2021, and reporting another 37% increase in sales in 2022, last year was a year of consolidation for the business. Full year sales actually fell 9% to $518 million, as solid expense management made that operating earnings were down ̈just ̈ 12% to $132 million. Amidst interest income received on net cash balances, GAAP earnings were reported above operating earnings, at $136 million in dollar terms, for earnings of $4.
28 per share based on a share tally of 32 million shares. Momentum was not readily seen, as the company ended the year with an 11% decline in fourth quarter sales to $134 million. The company guided for sequential improvements, seeing first quarter sales for the fiscal year 2024 between $134 and $140 million.
Improving In May, the company posted a very impressive first quarter earnings report. Revenues were posted at nearly $142 million, comfortably topping the outlook for the quarter, with sales reported up 6% on an annual basis, after fourth quarter sales for 2023 were still down substantially year-over-year. Moreover, the company guided for the recovery to continue into the second quarter, with sales seen between $144 and $152 million.
In Augusts, the company reported an impressive 28% increase in second quarter sales to nearly $157 million, topping the high-end of the guidance by a comfortable margin, as in the time frame of just two quarters, the company has seen sales accelerate from negative trends to nearly up 30%. Moreover, the company reported record bookings for advanced packaging processes and materials metrology solutions, yet this statement was unfortunately not quantified. Growth was driven by all geographies, major customer accounts, new customer accounts and technologies.
The company posted GAAP earnings of $45 million, equal to $1.41 per share, with adjusted earnings posted at $52 million, equal to $1.61 per share.
For now, the GAAP earnings look more realistic, as adjusted earnings exclude over $6 million in quarterly stock-based compensation expenses. The earnings numbers are furthermore misleading, as they include $8 million in interest income, equal to $0.27 per share.
If we back this out, realistic earnings from operations come in around $1.15 per share on a real operating basis, trending at $4.60 per annum.
Current Valuation Thoughts Trading at $200, the company commands a $6.4 billion equity valuation. If we back out $760 million in cash and equivalents, while assume that convertible notes are converted, operating assets are valued at just over $5.
6 billion. This values the business at less than 10 times sales here. With net cash holdings equal to about $23 per share, operating asset valuations come in around $177 per share.
Based on realistic earnings of $4.60 per share (that is after backing out stock-based compensation charges and interest income boosting earnings), the company trades at a realistic near 40 times earnings. This is about to change as the company outlined that momentum is set to continue, with third quarter sales seen between $168 and $176 million, marking continued sequential improvements.
This suggests that revenues trend around $700 million already, reducing sales multiples to about 8 times, as earnings power likely will trend around $5 per share, still yielding a premium multiple in the mid-thirties. Peers like Onto Innovation ( ONTO ) and KLA Corp ( KLAC ) have seen improved momentum. Onto posted a 27% increase in second quarter sales, now trending close to a billion per annum, being valued around a similar 8 times annualised sales multiple.
KLA is a much larger and broad-based peer, with sales seen around $10 billion per annum. Therefore, its 9% increase in quarterly sales seems much less impressive, as it trades near 10 times sales. A Preliminary Conclusion Given the discussion above, I am performing a balancing act.
Shares are up 100% from the lows in the fall of last year, but are down 20% from recent highs. In the meantime, the company is cranking out record results, with momentum being very strong. Amidst all this, Nova commands premium multiples at around 8 times forward sales and 35 times earnings (after backing out net cash holdings), but this has been deserved based on the historical performance and outlook for the business.
Given all this, I am growing more impressed with the business after 2023 was a year of consolidation, as the secular growth strength has returned to full strength. Moreover, current growth rates look superior to peers and the wider sector. Current valuations are demanding, but not outrageous, certainly not given the growth rates reported.
Moreover, the business is capital light, and in fact the company has prepared for a billion revenue base here. Amidst all this, I am keen to learn more on the business, and hope to take advantage of an unexpected setback in the stock, induced by the volatility in the sector at large. For now, I am not yet willing to jump the bandwagon, looking to learn more on the business and hoping for a setback to potentially considering an initial position.
If you like to see more ideas, please subscribe to the premium service "Value in Corporate Events" here and try the free trial. In this service we cover major earnings events, M&A, IPOs and other significant corporate events with actionable ideas. Furthermore, we provide coverage of situations and names on request! The Value Investor has a Master of Science with specialization in financial markets and a decade of experience tracking companies via catalytic company events.
Analyst’s Disclosure: I/we have no stock, option or similar derivative position in any of the companies mentioned, and no plans to initiate any such positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha).
I have no business relationship with any company whose stock is mentioned in this article. Seeking Alpha's Disclosure: Past performance is no guarantee of future results. No recommendation or advice is being given as to whether any investment is suitable for a particular investor.
Any views or opinions expressed above may not reflect those of Seeking Alpha as a whole. Seeking Alpha is not a licensed securities dealer, broker or US investment adviser or investment bank. Our analysts are third party authors that include both professional investors and individual investors who may not be licensed or certified by any institute or regulatory body.
.
