Nova: Publicity To HBM Market Doubtless To Spur Metrology/Inspection Efficiency (NVMI)

Nova (NASDAQ:NVMI) introduced monetary outcomes for the third quarter on November 9, 2023, the three-month interval ending September 30, 2023.

Within the third quarter of 2023, whole revenues reached $128.8 million, marking a 5% enhance from the second quarter of the identical yr and a ten% YoY lower. Non-GAAP internet revenue of $39.4 million, or $1.23 per diluted share, a 16% enhance QoQ, exceeding the Firm steering of $1.13.

Administration supplied an outlook for the fourth quarter, the interval ending December 31, 2023. Based mostly on present estimates, administration expects $123 million to $132 million in income and a Non-GAAP EPS of $1.16 to $1.31 per diluted share.

Importantly, NVMI indicated potential progress within the excessive bandwidth reminiscence (“HBM”) market due to excessive publicity to the reminiscence sector. I analyzed HBM in quite a few Looking for Alpha articles, the most recent, a November 21, 2023 article.

In Nova’s Q3 earnings call, CEO Gaby Waisman famous:

In Q3, our reminiscence gross sales grew by greater than 75% in comparison with the earlier quarter and amounted to 35% of our product income. We anticipate this pattern to proceed into This fall with DRAM investments, together with high-bandwidth reminiscence, appearing as the principle driver.”

When I first wrote about NVMI in my November 19, 2019, Seeking Alpha article, there were two issues that I felt were headwinds for the company. First, it introduced a new PRIZM optical metrology system, that according to my sources was not well received in Mainland China because of technical issues. In fact in the company’s earnings call prior to my article, the CEO admitted it hadn’t been paid for systems delivered.

Since that time, the “PRIZM” system has been rebadged and upgraded to “PRISM 2”, offering improved sensitivity and accuracy. It is now gaining traction in advanced packaging applications to house artificial intelligence processors and 3-D stacking.

Growing Demand for NVMI’s Technology

NVMI sells metrology/inspection equipment, critical to assuring high yields during semiconductor manufacturing. Metrology systems are used to measure parameters such as thin film thickness or linewidths, and inspection systems are used to detect defects and monitor abnormalities in production.

NVMI’s technology and products are primarily centered around monitoring semiconductor processing, which involves over 700 steps spanning three months for each semiconductor wafer and device. The core of NVMI’s offerings lies in inspection and metrology equipment.

A key emphasis for NVMI is its significant contribution to yield enhancement in semiconductor manufacturing. The company’s inspection systems play a vital role in identifying and classifying defects at different production stages. This capability enables manufacturers to pinpoint and rectify issues that may affect yield. NVMI’s sophisticated analytics and data management software further aid in analyzing collected data, facilitating the optimization of process parameters and overall improvement in yield for semiconductor production.

NVMI’s Market Share

According to The Information Network’s report, NVMI’s market share has only grown from 1.9% to 3.3% in the past 10 years, as illustrated in Chart 1. In contrast, KLA’s (KLAC) market share increased from 51% to 60%.

Chart 1

Chart 2 shows metrology/inspection equipment revenue change for three quarters of 2023 versus 3Qs 2022. KLA led share growth with just a 0.1% growth. NVMI’s revenue growth was -11.6% YoY, as the company underperformed ASML (ASML), which exhibited a -22.1% revenue change. ASML, while normally thought of as a lithography equipment supplier, also sells metrology/inspection equipment from its acquisition of Hermes Microvision. Onto Innovation’s (ONTO) revenue change was a dismal -54.7%.

Chart 2

Investor Takeaway

A comparison of the four companies is difficult because ASML is primarily a lithography company with just 2% of its revenues from metrology/inspection. Despite that, the company held a 5.4% share of the metrology/inspection market in 2022.

ONTO used to be a pure-play metrology/inspection company but has since morphed into a packaging company. In 2022, it held a 2.6% share of the metrology/inspection market. However, ten years ago, prior to the merger of Rudolph Technologies and Nanometrics, the combined share of the individual companies was 6.9%.

Clearly Seeking Alpha Quant Ratings and Wall St. Analyst Ratings shown in Chart 3 are not indicative of ONTO’s share and growth in the Metrology/Inspection sector.

Chart 3

Chart 4 shows share price for the four companies for the past 1-year period. All companies exhibited a drop at the end of October 2023 followed by a strong November and December.

Chart 4

Chart 5 shows P/E ratios for the five companies. The semiconductor industry average is currently 25.4x. KLAC is the better value at 25.82x, while ONTO’s is 50% higher at 47.23x.

Chart 5

NVMI’s high exposure of sales revenue from Mainland China is a risk. According to its Q3 investor presentation, NVMI’s exposure to Mainland China was 35%. Geopolitical uncertainty is a great risk for the company. On exposure to Mainland China, U.S. sanctions have been consistently expanded and tightened to prevent equipment from being exported to Mainland China.

The motivation behind Washington’s action is grounded in the conviction that China’s military should be denied access to cutting-edge AI chips and supercomputers. Consequently, measures have been implemented to impede China’s capability to develop weapons of mass destruction and autonomous weaponry. The export control measures are explicitly directed at advanced chips and the equipment employed in chip manufacturing.

Current restrictions on exported semiconductor equipment are limited to logic ICs with a production technology node of 16/14 nm or less; and NAND memory ICs with 128 layers or more. If these restrictions are further tightened to smaller nodes, it could impact NVMI’s sales.

Alternatively, Mainland China could impose sanctions of its own. For example, in May 2023, China prohibited major chip manufacturer Micron (MU) from participating in crucial infrastructure projects, asserting that products produced by the U.S. memory chip giant pose a national security threat. The nation’s cyberspace regulator declared Micron, the largest U.S. memory chip maker, is deemed to present “severe community safety dangers.”

From a positive standpoint, Nova is strengthening its market position, driven by robust free cash flow and prudent financial management. The conclusion of 2023 is anticipated to showcase exceptional non-GAAP profitability, with margins hovering around 59% and operating margins nearing 30%. Additionally, a tax rate reduction of 8% is expected for Q4. The Q4 guidance encompasses revenues ranging from $123 to $132 million, non-GAAP EPS projected between $1.16 and $1.31, and gross margins anticipated at 58%.

I charge NVMI a Purchase.