- Signal from Noise
– Internet of Things LT growth bodes well for semi-conductor equipment maker growth – LRCX and AMAT shares near highs but at relatively undemanding valuation multiples – As new IoT demand materializes—autos, healthcare—stocks could rise 25% or more In the previous Signal From Noise (June 17, Continued IoT Growth Good News for Nordic Semiconductor), I...
- Signal from Noise
Continued IoT Growth Good News for Nordic Semiconductor
– Nordic Semi launched 2020 suite of new products that should help accelerate growth – Mid-teens sales growth could rise to 20%; stock undervalued vs peers on EV/sales – Growth could propel EBITDA margin to 19% from 14% and stock by up to 50% The arrival of the coronavirus (COVID-19) outbreak has shunted aside most other equity market themes and worries, and understandably so. With the market having recovered most of its losses and as sentiment heals, previous topics should again be recognized among investors. Source: Nordic Semi I believe one of those resurgent ideas will be the “Internet of Things” (IOT), a subject that remains rich in possibilities both for the world’s consumers and for companies that provide the architecture and backbone. For the uninitiated, IOT represents a world where most objects can be connected via the internet and local networks, giving and receiving data, from refrigerators to respirators to home security devices, and making them work better. An IOT fridge, for example, could tell you the condenser has reached the end of its usefulness. With innovative sensors, IOT can help cars avoid accidents. Nordic Semiconductor (NOD. NO) is likely a company you have not heard of, as it’s small (with a market cap just over $1 billion) and headquartered in faraway Norway. But don’t hold that against it, as the Trondheim-based company happens to be a leader in Bluetooth wireless technology, among other wireless communication systems. As a fabless semiconductor designer, it develops and sells integrated circuits and related solutions for short-range wireless communication, particularly ultra-low power components. Why does Nordic Semiconductor matter? Over the next three to five years, thanks to new products, the ongoing growth in IOT should lead to improving sales growth and to its stock price continuing to rise, even from its current level near an all-time high now, of 72NOK. (USD$1= 10 NOK). I think this company has potential. Not only is it a leader in Bluetooth, it developed and launched in 2020 a new set of products, says Jeffrey Meyers, founder and CIO of institutional investor Cobia Capital Management, a big fan of the stock. (Cobia owns shares for clients and Meyers owns shares in his own account.) Nordic Semiconductor is poised to accelerate its already strong revenue growth and expand margins as those products can be used in the IoT, he adds. The company enjoys a good reputation. An industry expert, DNB Markets, tracks the number of design wins in the space and in Q120, Nordic had 142 wins representing 49% market share in the market. The rest of the market share is fragmented between competitors such as Texas Instruments, Dialog Semiconductor, Qualcomm, Infineon, and Silicon Labs. Where do Nordic Semi designed products go? Pretty much anywhere that is moving to the IOT, smart electricity meters, smart agricultural products, street lighting, taxi fleet management services, among many other places. The company says its chips are used by many brands in a wide variety of applications, including wireless PC peripherals, gaming, sports and fitness, mobile phone accessories, consumer electronics, toys, healthcare and automation. I think in the long run, the end uses for these chip sets are basically limited by engineers’ imaginations. Nordic breaks up its revenue into five end markets: Consumer electronics (35% of revs in Q1, grew 16% YoY), Wearables (16% of revs, grew 49% YoY), Building / Retail (19% of revs, grew 64% YoY), Healthcare (8% of revs, grew 28% YoY), Other (17% of revs, grew 38% YoY). It is a pretty well-diversified mix for a mid-sized company, Meyers says. Here are just two examples of 2020 new products: it launched chip sets for farm fuel or fertilizer storage tank fill levels, to avoid unnecessary truck deliveries of those items, as well and a chip set to be used as a “tooth sensor,” enabling dentists and their patients to continuously monitor saliva pH levels and create personalized oral health strategies. (See page 1.) This is IOT. Undoubtedly, someone is working on a coffee cup that will tell you when it needs refilling. Joking aside, Nordic Semi has been growing sales around mid-teens percentage but the new product cycle, says Meyers, should last a few years and push sales growth towards or possibly above 20%, compared to about 10% for the industry. Source: Nordic Semi With the stock around an all-time high, what about the valuation? EV/sales is a metric used in the industry and Nordic Semi is about 2.8 times estimated 2021 NOK4 billion ($400 million) in sales. There aren’t many pure comps but Silicon Labs (SLAB) is close and it sells at 4.5 times sales. If Nordic were awarded such a valuation—and I think eventually it’s possible because of the new products and because it is growing faster than SLAB—then the shares could rise around 50% over the next few years, to around 105 NOK. Additionally, profitability is also poised to improve as well, beyond SG&A leverage from increasing growth. Nordic has been spending 10% of its revenue over the past few years on R&D for its cellular chips, which haven’t been generating any sales. Now that the chips are out, this spend level can come down at the same time as the new cellular revenue ramps up, creating potentially impressive R&D leverage, Meyers says. He expects EBITDA margins to ramp from 13.7% in 2020 to 18.7% in 2021. One trading caveat is that Nordic Semi doesn’t have an ADR. Nevertheless, some electronic trading platforms, like Schwab, allow investors to buy the ordinaries in the home market. Be aware, however, that there is currency risk involved. On the other hand, Norway is a country where rule of law is established so it’s probably less risky than, say a Chinese fabless company. Where I could be wrong: Bluetooth technology could be supplanted, or the IOT not be as important as I think. I believe these are low-risk concerns. Bottom Line: There are many reasons to like Nordic Semiconductor. If the new products create accelerating growth, investors will be attracted to the stock. 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