Navitas Is A Tremendous Bargain With Great Growth Potential (NASDAQ:NVTS)

Navitas is a vital cog in the semiconductor industry

Navitas Semiconductor Corporation (NASDAQ:NVTS) is a vital cog in semiconductor industry, making integrated circuits more power efficient. This is a research and development powerhouse with over 250 patents, working with 10 of the world’s top 10 mobile equipment manufacturers, and several other OEMs, and IDMs in the semiconductor industry.

Navitas makes Gallium Nitride or GaN Power Circuits, which are a huge improvement over Silicon Carbide circuits, especially when it comes to power consumption, performance, and sustainability. Power consumption, which is a large expense in all the end user segments for semiconductors, especially data centers, is a big incentive for users to migrate to GaN. Navitas positions itself as faster charging, higher power density and greater energy savings for its users. As everyday users, we see Navitas’ products in our phone chargers and assorted power strips.

I believe this can be a great investment for several reasons:

• GaN technology has a long runway of growth compared to Silicon Carbide, which has been the default standard in power chips.
• Navitas is well diversified with several user segments ranging from industrial, auto, data centers to consumer.
• It is at its lowest price-to-sales ratio in its history and its lowest valuation since it went public.

The Bull Case for Navitas

Navitas has several things going for it, and I’ll highlight a few below:

Large pipeline and strong industry growth

Navitas has a large pipeline of $1.25Bn as shown above. To be sure this is a growing market and while some verticals like mobility were going through troughs, the diversity of Navitas’ end markets is a big strength as shown above.

The pipeline itself grew tremendously at 65% in just 7 months from May to December 2023, with all segments showing growth.

Appliances/Industrial leads the way with 153% growth from $150Mn to $380Mn, followed by 67% growth from solar from $150Mn to $250Mn. Its largest segment EV grows 33% from $300Mn to $400Mn. EV is a big space for Navitas, the opportunities of increasing electrification content in vehicles from ADAS (Advanced Driver Assist Systems), Robotaxis and the drive to complete autonomy bodes well for the future of this segment.

I took the IoT worldwide revenues by segment as a proxy for some of Navitas’ end-user segments to see if the growth in Navitas’ pipeline complemented the growth in IoT. The chart below confirms that it did, giving me further confidence that Navitas’ pipeline has a strong chance of succeeding and that having a vertical agnostic product was the right way to go to capture the growth from all end users.

As we can see the total IoT market grows from $1.177Bn to $2.267Bn from 2023 to 2028 at a CAGR of 14%. The two largest segments, Industrial grows at 14% from $276Mn to $525Mn, and Auto grows at 18% from $393Mn to $882Mn.

Replacing Silicon with Gallium Nitrite

Silicon integrated circuits are still in a vast majority of power devices, mainly because of lower costs since power is a major component of semiconductor usage. But with scale, management strongly believes that speed, power, and size of integrated GaN circuits will prevail, and eliminate the current cost advantage. With the sales growth seen across major competitors in the table below – with GaN pure plays growing faster than their larger multi-product competitors, this is already happening. In its most recent earnings transcript, management gave the example of having developments with 3 of the top 5 solar OEMs and mobile customers such as OPPO and Xiaomi to ship over 30% of all their chargers with GaN technology. In higher power systems integrated GaN circuits are already at cost parity. The transition to electric vehicles is going to help the adoption of GaN circuits tremendously, even as automakers produce fewer vehicles. GaN circuits are also going to be very useful for data centers as a GaN-based data centers can improve efficiency up to 84%.

Improving performance

Margin improvements – This is crucial and to achieve better multiples Navitas has to improve its margins; So far, gross margins have moved up to 42.5%. For 2024, they expect margins to improve modestly, below the mid-forties, but that is only because Q1 and Q2 have a larger share of mobile revenues. As auto, industrial, and data center pick margins should continue to improve in the second half of 2024, and then onwards.

Operating margins have also declined to 75% of expenses in Q4-23, and for 2024, they expect operating expenses to grow in the mid-20s, which of course is so much lower than 43% revenue growth.

The working capital improvements with more inventory turns and a reduction in the cash conversion cycle are also great indicators of the business model working better with scale.

Besides the improvements in performance in 2023, Navitas has small capital expenditure requirements and doesn’t need or waste a lot of cash.

R&D and patents are key to their success with 87% of revenues being spent on R&D, and as we can see with revenues improving this number will keep doing even as R&D spending grows.

Attractive valuation makes Navitas a strong bargain

Navitas had a horrible past twelve months, the stock was clobbered 30%, when other semis recovered from their respective lows much before the semiconductor cyclical through was over, including a whole bunch of cyclicals like Micron Technology, Inc. (MU) and Lam Research Corporation (LRCX). Navitas too deserves a better price and recovery from this low. At 5.8x,2024 sales Navitas is at its lowest-ever P/S multiple.

Compelling valuation amongst competitors

I analyzed Navitas with the closest pure play, power competitors and then with larger well diversified competitors with GaN and SiC products.

At 5.8x sales, Navitas is less than half of Transphorm, Inc.’s (TGAN) valuation of 12.75 x sales. Worse, it doesn’t even compete with Navitas in SiC, Navitas’ sales growth is 54%, just a little bit lower compared to Transphorm’s 60%; I would make the argument Navitas can easily grow into that multiple with that growth. Further, Transphorm has already appreciated 72% in the past year, while Navitas has dropped 30%. Power Integrations, Inc. (POWI) is larger with a Market Cap of $3.8Bn, and at $450Mn about 4x Navitas’ sales of $113Mn. It is a much slower grower at 13%, but still has a much higher P/S growth ratio of 8.5, so clearly Navitas does seem like the pick of the litter to get the best return.

The larger competitors have slower sales growth and lower P/S multiples as shown above, but they have much bigger bases to grow from and have other segments as well besides GaN and SiC, but importantly they are very profitable. Infineon Technologies AG, (OTCQX:IFNNY) ON Semiconductor Corporation (ON) and STMicroelectronics N.V. (STM) have GAAP operating margins of over 25%, 32% and 28% respectively. With great power chip sales comes great profits.

Weaknesses and challenges

62% of their sales are to China

62% dependence on China makes Navitas highly susceptible to Chinese growth. Chinese GDP forecasts for 2024 have dwindled to 4.8%, a far cry from the heady days of pre-pandemic growth. Worse, the IMF expects growth to fall further to 4.1% in 2025, so China could be a big drag on Navitas’ prospects.

Plus there are geopolitical tensions between with the two world’s biggest economies, which hurt semiconductors the most with trade restrictions from both sides.

Besides China, some of Navitas’ end-user segments are likely to remain sluggish in 2024.

A lid on valuation with higher for longer interest rates

I think the other big risk is valuation and lower multiples from higher interest rates, with the two-year treasury yield at 4.94% – I don’t see that abating soon and long-duration tech growth stories rarely find favor till rates come down.

Still, Navitas is projected to grow at 54% revenues for the next 4 years – this could be a huge opportunity. When you’re buying a micro-cap in a growth industry this is a normal risk profile, and we’re lucky to get a price where the downside is fairly limited. Navitas is selling for 4x cash so the chances of it falling further are fairly low.

Navitas is a strong bargain with tremendous growth ahead

Navitas grew revenues by 110% to $80Mn in 2023, and in the past 4 years has grown revenue at a CAGR of 162%, as we can see from the table above.

Navitas’ Management guided to 40% to 50% revenue growth for 2024 and analyst consensus forecasts 43% growth in 2024, which could be conservative. These estimates also take into account a somewhat muted Q1 and Q2, but expect the second half to be much stronger, and if that trend continues, I do believe that Navitas can grow at a CAGR of 54% for the next 4 years. The base is very small and easily achievable given its wide reach and vertical agnostic products.

Navitas is at its lowest P/S ratio in its history. There was a good article on Navitas, which recommended a sell when the P/S ratio was at 21, and it made sense to not overpay, but at 1/4 of that multiple, I strongly believe that downside is limited with the stock likely doubling in the next 3 years and with the potential of being a multi-bagger. With that kind of forecasted growth, Navitas’ P/S multiple drops to 1.4 in 2027 – a year it is forecasted to grow at 47%! Also, while I’ve not delved into earnings, clearly analysts are expecting positive adjusted EPS by December 26. Given the improvements in operating margins as R&D costs get spread over a larger base and the resulting operating leverage – adjusted operating profits are possible by 2026. Adjusted EPS could grow to $0.51 on December 27, which at the bare minimum should have a P/E of 20 or a price above $10.

Navitas’ market cap of $652Mn is just 4.26 times its cash balance of $153Mn — we are getting the company for very little with so much promise of:

• Wide acceptance of its products in several growth segments of semiconductors, industrial IoT, Autos, and EVs, and solar.
• A growing GaN segment taking share from older SiC technology.
• Strong patent lineup and R&D excellence.
• Excellent sales growth at a bargain multiple.

I own shares, and I am recommending a strong buy.