Risk/Reward Rating: Positive
NVE Corporation is a micro-cap semiconductor company in Minnesota with a unique opportunity set given current trends in the industry and the onshoring of US manufacturing and critical industrial supply chains. The explosive potential is centered on these macro trends and is amplified by NVE’s extraordinary profitability and extremely small share count.
The share count stands at only 4.8 million shares. In today’s markets, which feature meme stocks and short squeezes, such a tight share count can create and amplify explosive price movements given the inherent illiquidity in such few shares and the longer-term nature of the existing shareholders.
NVE has extraordinary profit margins compared to its peers. The gross profit margin is 81% of sales and the operating income margin before tax is an incredible 60% of sales. If sales growth begins to accelerate given the positive macro trends for the semiconductor industry, the operating leverage on these margins is substantial as much of the increased sales fall directly to the bottom line with very few shares to dilute the increased earnings.
On the business front, NVE’s vision is to become the leading developer of practical spintronics technology and devices. Spintronics utilizes electron spin rather than electron charge to store and transmit information. The spintronic technology provides the eyes, nerves, and brains for electronic systems. NVE’s sensors and couplers play into the global “Internet of Things” mega trend.
NVE’s sensor products detect the strength or gradient of magnetic fields and are often used to determine position or speed. Spintronic sensors are smaller, more precise and reliable, and consume less power than competing devices. Industrial automation has been the primary market in the past. The automotive market offers a large opportunity as vehicles become increasingly electrified, smarter and more computerized.
The sensors have penetrated the medical device market as well. Current applications are in pacemakers and hearing aids. The market opportunity is large as wearable technologies gain popularity and further medical device applications are developed. The important advantages in medical devices compared to electromechanical switches include: no moving parts, greater reliability, smaller size, greater sensitivity, and increased precision.
NVE’s spintronic couplers transmit data nearly instantaneously. Couplers are also known as “isolators” because they electrically isolate the coupled systems. NVE’s IsoLoop couplers are faster than the fastest optical couplers. The primary market for the couplers has been the Industrial Internet of Things market for factory automation. Like the sensors, the automotive market is a large opportunity longer term.
There are many avenues for future upside. The company has expertise and owns patents in MRAM technology. MRAM uses spintronics to store data. It could be an ideal memory technology because of its potential to combine the speed of SRAM, the density of DRAM, and the nonvolatility of flash memory.
The company also has a robust R&D collaboration with various US government agencies such as the Department of Defense. Many long-term opportunities could blossom from this work. One example is their recent cryptographic encryption and security technology collaboration.
Valuation: 30x fiscal 2021 actual earnings, the fiscal year ended on 3-31-21. Sales were hurt by the COVID lockdowns, so the prior fiscal year is a better baseline for valuation which is 24x fiscal 2020 earnings.
The company has a long history of consistent profitability, and the balance sheet is rock solid with zero debt and excess cash. The company pays a dividend of $4 per share providing a dividend yield of 5.5% currently. If growth begins to accelerate, the company may decide to retain some of this excess cash to reinvest in more capacity.
Technical resistance: Lower $80’s then $100. The tight share count may render these levels moot given that shareholders are likely to be long-term niche owners waiting for the large macro trend opportunities to unfold.
Technical support: $65 area. The company has put in a two-year W consolidation pattern which should offer a strong support base.
NVE Corporation 2-year daily chart
Price as of report date 6-24-21: $72.68
NVE Investor Relations Website: NVE Investor Relations