Navitas Semiconductor Could Have Further To Fall

It’s been about a year since Navitas Semiconductor (NASDAQ:NVTS) went public on October 20, 2021, using a SPAC. NVTS was able to raise $320M in proceeds, giving NVTS an enterprise value of around $1.7B, which some might say was on the hefty side for a company without any profits and expected revenue of just $27M. NVTS went public at a time when semis were riding high and interest was high in newcomers, which helped the stock in its debut. However, much has changed since then, something that is likely to affect the stock going forward. Why will be covered next.

NVTS fortunes have changed

NVTS got off to a fast start, but those days are gone. The stock initially traded at around $13, before it went on a huge rally that saw the stock gain over 50% in less than a month, culminating in a peak of $20.16 in November. However, the stock has been in decline ever since. The stock is currently worth $3.94, which means NVTS has lost 77% of its value YTD. The chart below shows how the stock has declined in 2022.

In fact, the stock appears to be in a downtrend. Note how a channel can be drawn by connecting a series of lower highs to form an upper trendline and by connecting a series of lower lows to form a lower trendline. The stock has respected the boundaries imposed by both of these trendlines by staying within its limits. And since the channel is pointing down, the stock is moving lower as a consequence.

NVTS is growing fast

It’s worth pointing out that even though the stock has lost more than three-fourths of its value in 2022, NVTS still trades at what some may perceive to be lofty valuations. Note that NVTS is not assigned a multiple for many of the most commonly used metrics due to its lack of earnings. However, with sales of $28.2M on a TTM basis, NVTS is valued at around 22 times sales with a market cap of $630M.

On the other hand, NVTS is growing fast. Guidance calls for Q3 FY2022 revenue of $9-11M, an increase of 78.6% YoY at the midpoint. Gross margins are expected to decrease as a result of the need to invest in new markets, which come with lower margins at the start, and higher costs with foundries raising their prices.

Note that Q3 revenue includes partial contributions from the GeneSiC acquisition. The acquisition will cost NVTS $100M in cash, 24.9M shares of NVTS stock and possible earnout payments of up to $25M. Keep in mind that the GeneSiC acquisition comes not long after the earlier acquisition of VDD Tech.

GeneSiC will supplement the existing GaN business with a SiC component. The addition of SiC will expand the scope of NVTS offerings, especially in the market for electrical vehicles. This could come in handy since NVTS is overly exposed to the smartphone market, which is seeing falling demand, especially in China.

(Non-GAAP)	Q3 FY2022 (guidance)	Q3 FY2021	YoY (midpoint)
Revenue	$9-11M	$5.6M	78.57%
Gross margin	38-42%	46.2%	(620bps)

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Source: NVTS

In addition, management had some preliminary numbers for Q4 FY2022. The outlook sees Q4 revenue of $13-16M, up from $7.3M a year ago and an increase of 98.6% YoY at the midpoint. FY2022 revenue is projected to be $37.3-42.3M, up from $23.7M in FY2021 and an increase of 67.9% YoY at the midpoint.

“Our preliminary outlook for revenue in the fourth quarter of 2022 ranges from $13 million to $16 million. And that reflects continued softness in the China mobile market and our outlook for gross margins is in the range of 43% plus or minus 2%.”

A transcript of the Q2 FY2022 earnings call can be found here.

Granted, acquisitions play a role, but the numbers show a gradual acceleration in growth at NVTS. In Q2 FY2022, for instance, revenue increased by 58% to $8.6M. Margins are heading down, but they are expected to get better.

“As we noted last quarter, we believe this impact on gross margins is temporary. We expect that gross margins will improve over the next few quarters as we transition to our generation for products and the China mobile market begins to improve.”

NVTS finished with a non-GAAP loss of $9.1M or $0.07 per share, but as long as the top line increases by leaps and bounds, investors might be willing to look past the bottom line. The non-GAAP weighted-average number of shares outstanding was 124M, which is much more than the 20.9M a year ago when NVTS was yet to be publicly listed. The share dilution will increase in light of recent acquisitions.

Note that NVTS ended up with GAAP net income of $33.8M or $0.26 per share in Q2 even though GAAP operating loss was $20M. This is due to a $54.8M gain from the change in the fair value of earnout liabilities. This is not that different from Q1 FY2022 when GAAP net income was $79.8M or $0.61 per share due to a $63.4M gain from the change in the fair value of earnout liabilities and a $51.8M gain from the change in the fair value of warrants.

NVTS ended Q2 with cash and cash equivalents of $240.5M on its balance sheet, although that is without accounting for recent acquisitions which will reduce the cash hoard substantially. The table below shows how the numbers have progressed in recent quarters.

(GAAP)	Q2 FY2022	Q1 FY2022	Q2 FY2021	QoQ	YoY
Net sales	$8.611M	$6.740M	$5.450M	27.76%	58.00%
Gross margin	41.6%	44.0%	45.5%	(240bps)	(390bps)
Income (loss) from operations	($20.014M)	($34.994M)	($18.582M)	–	–
Net income	$33.837M	$79.792M	($18.650M)	(57.59%)	–
EPS	$0.26	$0.61	($0.89)	(57.38%)	–
(Non-GAAP)
Net sales	$8.611M	$6.740M	$5.450M	27.76%	58.00%
Gross margin	41.6%	44.0%	46.0%	(240bps)	(440bps)
Income from operations	($8.894M)	($9.580M)	($5.764M)	–	–
Net income	($9.112M)	($9.607M)	($5.832M)	–	–
EPS	($0.07)	($0.08)	($0.28)	–	–

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Why NVTS has seen its stock drop and why it could continue

It’s true NVTS has suffered setbacks this year. For instance, a sluggish smartphone market has affected sentiment towards NVTS due to its exposure to fast chargers used by smartphones. This weakness is expected to last a while with the smartphone market yet to recover.

“while our GaN position in the mobile market has never been stronger, we do see significant headwinds given the softness in the China’s smartphone market. We see a combination of supply chain disruptions from shutdowns and shortages, but also now excess smartphone inventories which are impacting the timing and sell through of new model options. While visibility is limited, we anticipate this softness will likely continue through Q4 and possibly into early ’23.”

However, the drastic change in the stock’s fortunes from last year to this year can be attributed primarily to changes on the macro front. NVTS is growing fast, but the market is no longer chasing growth the way it used to. As a result, the market is no longer willing to pay as big a premium for growth as before.

This has everything to do with monetary tightening, which has led to higher interest rates and reduced liquidity. Bond yields are such that stocks are no longer the only game in town. Growth stocks have suffered and semis have been among the hardest hit. The iShares PHLX Semiconductor ETF (SOXX), for instance, has lost nearly twice as much as the SPDR S&P500 ETF (SPY) in 2022.

This trend of tighter conditions is unlikely to go away anytime soon. This suggests that the stock of NVTS could be in for further declines since valuations may still be perceived as way too high in today’s environment where risk off has taken over from risk on. If NVTS is heading in one direction in the near future, it’s mostly likely to be down for these reasons.

Investor takeaways

On paper, NVTS has lots of potential. Demand for GaN and SiC is expected to soar in the coming years, which creates lots of opportunities for NVTS. The quarterly numbers released since NVTS went public suggest NVTS is indeed benefiting from rising demand. FY2022 revenue is projected to increase from $24M a year ago to around $40M.

However, the increase is coming off of a narrow base. NVTS is working on diversifying its revenue base by depending less on the smartphone market, but that will take time. NVTS is also not the only source for GaN or SiC. While the top line is growing fast, NVTS has yet to post an operating profit. NVTS should get there as long as the top line keeps growing the way it has, but there’s always the risk of some hiccup along the way. The future is not guaranteed and there is a risk that NVTS may not pan out.

I am neutral on NVTS. NVTS is basically a speculative play that may pan out at some point down the road. NVTS is heading in the right way if the quarterly numbers and outlook is any indication, which is a positive sign that bodes well for the future. Having said that, the stock is most likely heading lower with the way things stand.

The reality is that NVTS came into 2022 with what many would agree are lofty valuations. That may have been justified last year when the semiconductor sector was soaring high and vast amounts of stimulus was being injected into the market, but very high valuations are much harder to justify with all the changes this year.

Stocks have struggled all year and not without reason. The combination of slower economic growth and tighter monetary conditions are putting pressure on multiples to compress. There is a reason after all why NVTS stock has been trending lower all year. And if the charts are anything to go by, the stock has yet to reach bottom, especially not at current valuations and with all the headwinds that have given NVTS problems still out there.

Bottom line, NVTS may be worth a second look down the road, but long NVTS is unlikely to pay off in the short term. Shares are being diluted. NVTS has potential, but that potential has ways to go before it is to be fully realized. Those with a longer horizon may be more willing to place bets on NVTS, but even then, a reward is not guaranteed. There may come a time when long NVTS is warranted, but not right now in my opinion.