NVE Corporation Stock: Light At The End Of The Tunnel

NVE Corporation (NASDAQ:NVEC) has some appealing attributes. For instance, NVEC pays a quarterly dividend of $1.00, or $4.00 on an annual basis. NVEC has a dividend yield of 8.3%, which is quite high for a tech stock, especially in the semiconductor space. Still, the stock has done poorly, giving stockholders not much to cheer about. The stock looks stuck in what can be described as a descending channel, a bearish chart pattern. However, things may be looking up in this regard. Why will be covered next.

Why there may be light at the end of the tunnel for NVEC

It’s not hard to see why long NVEC has been a losing proposition in 2022. Not only has the stock lost 31% YTD, but the manner in which it has done so has been pretty consistent. The chart below shows how the stock has trended lower in a pattern resembling a descending channel, going all the way back to last year

The channel is formed by two descending trendlines that run parallel to one another. The upper boundary is defined by a trendline connecting a series of lower highs and the lower boundary is defined by a trendline connecting a series of lower lows. The presence of the channel makes it easy to guess the likely direction of the stock and it is not the one the bulls would like it to be.

However, change may be underway. The stock could be close to finally breaking out of the channel it has been stuck in for over half a year. Resistance from the upper trendline has kept the stock contained, but the stock has been able to move past the upper boundary of the channel in recent days. The stock is still on the fence, but it appears resistance is giving ground. The breakout could still fail, but all signs point to one being underway.

It’s also worth noting how the stock bounced once it reached the $45 region. Reversing course after finding support in the $45 region would be consistent with what has happened before in the past. The stock reversed course once it got to the $45 region on multiple occasions in the last ten years as shown above, suggesting the presence of strong support at $45 or so.

If historical patterns hold, then the stock has likely hit bottom. If the stock was unable to move past the $45 region in past years, despite repeated attempts, then odds are the stock would not succeed in doing so this time around. The stock looks ready for an extended move higher, therefore. If this is true, then NVEC is a buy with the way the charts are laid out at the moment.

Why would someone be interested in NVEC

There are a number of reasons why people may be drawn to NVEC. For instance, NVEC is a developer of products utilizing spintronics, which relies on electron spin to receive and transmit data. On paper, spintronics affords a number of advantages that may prove to be useful in several emerging applications. Examples include electric vehicles, smart grids and hearables.

Taking a shot at NVEC does not have to come at too great a cost. NVEC is fairly priced. The table below shows the multiples NVEC trades at. For instance, NVEC has an enterprise value of $173M, which is equal to roughly 10 times EBITDA on a trailing basis. Note that there are no forward multiples because, unlike trailing multiples which are calculated using quarterly numbers from actual earnings reports, forward multiples are based on analyst estimates of which there are none.

Multiples are higher in terms of the top line. For instance, NVEC is valued at almost 9 times annual sales with a market cap of $228M. The stock also trades at 3.59 times book value, which may not be bad per se, but it’s not great either. NVEC makes up for it in terms of the bottom line, which arguably carries greater weight. NVEC is a very profitable company in terms of margins. Gross margins and EBITDA margins, for instance, are in the mid-seventies and low sixties respectively.

	NVEC
Market cap	$228.26M
Enterprise value	$173.26B
Revenue (“ttm”)	$27.0M
EBITDA	$16.8M
Trailing P/E	16.00
Forward P/E	N/A
PEG ratio	0.67
P/S	8.60
P/B	3.59
EV/sales	6.42
Trailing EV/EBITDA	10.35
Forward EV/EBITDA	N/A

Source: Seeking Alpha

However, the one attribute that probably gathers the most attention is the fact that NVEC comes with a dividend yield of 8.3%. It is true interest rates have been going up in 2022, but the search for yield is still ongoing. We are still in a low-yield environment. A yield of more than 8% is nothing to sneeze at, especially with NVEC’s solid track record in paying out this dividend.

NVEC has paid a $1.00 quarterly dividend since 2015. On the other hand, a $4.00 dividend equals a payout ratio of 133% with NVEC ending up with GAAP EPS of $3.00 in the recently concluded FY2022. Some people might frown at such a high dividend payout ratio, but NVEC is unlikely to lose the ability to pay this dividend for the foreseeable future.

The financials are healthy enough to keep paying a dividend for years to come. For instance, the cash flow statement has been net cash neutral or better in the last four fiscal years. NVEC has over $31M in cash and other short-term investments on its balance sheet, more than enough to cover the close to $5M needed for the quarterly dividend. Nothing is set in stone, but a dividend cut is unlikely anytime soon.

Why some may have reservations about NVEC

The balance sheet itself is in relatively good shape. There is not much leverage with total assets of $67.4M far exceeding total liabilities of $2.9M. However, there are some areas that could use some improvement. For instance, while NVEC has spent more on dividend payouts than it gets back in EPS, this has resulted in retained earnings showing a downward trend over the last decade.

Retained earnings have dropped in each of the last eight years, going from $86.7M in FY2015 to $45.6M in FY2022. Book value has declined accordingly during this time frame, going from $22.30 per share in FY2015 to $13.37 in FY2022. Some might argue that NVEC has not done a very good job creating shareholder value.

In addition, while NVEC is profitable, top and bottom line growth leave something to be desired. A look at the most recent earnings report shows why. NVEC actually posted double-digit growth in sales and profits in the recently concluded fiscal year. FY2022 revenue increased by 26.3% YoY to $27M and EPS increased by 24% YoY to $3.00. The table below shows the numbers for FY2022.

(GAAP)	FY2022	FY2021	YoY
Revenue	$26.99M	$21.37M	26.3%
Gross margin	76.8%	80.7%	(390bps)
Operating margin	60.5%	59.6%	90bps
Income from operations	$16.33M	$12.74M	28.2%
Net income	$14.51M	$11.69M	24.1%
EPS	$3.00	$2.42	24.0%

Source: NVEC

NVEC ended FY2022 on a solid note. Q4 revenue increased by 14.7% YoY to $6.7M and EPS increased by 21.5% YoY to $0.79. The table below shows the numbers for Q4 FY2022.

(GAAP)	Q4 FY2022	Q3 FY2022	Q4 FY2021	QoQ	YoY
Revenue	$6.72M	$6.29M	$5.86M	6.8%	14.7%
Gross margin	76.7%	78.0%	78.4%	(130bps)	(170bps)
Operating margin	60.9%	64.2%	60.0%	(330bps)	90bps
Income from operations	$4.09M	$4.04M	$3.52M	1.2%	16.2%
Net income	$3.82M	$3.47M	$3.13M	10.1%	22.0%
EPS	$0.79	$0.72	$0.65	9.7%	21.5%

Note that gross margins declined. Cost of sales is going up due to several factors, including higher foundry prices, higher prices for raw materials and the increased cost of labor. In addition, supply chain disruptions are a problem. From the Q4 earnings call:

“We believe that the impact of the COVID-19 pandemic on customer demand was significantly less in the most recent quarter and fiscal year when compared to the prior year. We believe the impact in the pandemic on our supply chain, however, was significantly more in the recent quarter end year than the prior period.”

A transcript of the Q4 FY2022 earnings call can be found here.

However, the most recent numbers may not be so bad, but a look further back in time shows that the top and the bottom line have remained fairly stagnant in the last ten years. For instance, revenue has grown at a CAGR of minus 0.56% and EBITDA has not done much better with a CAGR of 1.27%. Annual revenue has fluctuated between $21M and $31M. EBITDA has fluctuated between $13.3M and $20.2M. NVEC is currently somewhere in between.

NVEC is optimistic that it can do better, taking into account future demand for its products. For instance, NVEC has high hopes for an onboard charging system sensor for electrical vehicles. On the other hand, NVEC has suffered setbacks with the FDA yet to approve over-the-counter hearing aids. NVEC has potential, but that potential has yet to translate into sustained growth for the most part.

Investor takeaways

NVEC has some appealing attributes, but it also has some attributes that may be less appealing to others. The dividend yield of 8+% is arguably its greatest attraction at the moment. NVEC should be able to keep paying the dividend for quite some time, although there may come a time when it will be forced to make changes, unless it finds a way to grow earnings at a faster pace than it has so far.

The balance sheet is still in relatively good shape, but it was arguably in even better shape in previous years. Retained earnings have been going down for years. This may not be a problem in the short term, but it is not something that can continue indefinitely. NVEC needs to pick up the pace of growth, but sales and earnings growth have been stagnant on a multi-year basis.

Margins are great, but they’re offset by the lack of sustained growth. NVEC has done better recently with double-digit growth in FY2022, but it’s too early to tell if this is to be sustained or if it will fizzle out like in previous years. NVEC has gone through good years before, only to give it back in other years.

While rising cost of sales and supply chain issues are a problem, NVEC has been able to take advantage of today’s tight market with higher prices for its products. NVEC is growing by double digits right now. NVEC is eyeing a host of potential growth opportunities that could power growth forward in the coming years, but so far, they have not actually made that much of a difference.

NVEC may be a questionable fit as a long-term investment, but I am bullish on NVEC in the short term. The stock is close to breaking out of the descending channel, a bullish sign. The charts suggest the stock is more likely to be heading higher than lower. The stock is hovering above strong support, which past history suggests will hold its ground if challenged.

NVEC still has time to fix some of its problems. There’s still the possibility that some of the growth opportunities will come through this time around. The FDA, for instance, is still likely to approve the hearing aids, given enough time. If growth takes off in combination with the current dividend and valuations, NVEC might be a steal at its current price.

Bottom line, long NVEC may not be so prudent in the long run, but it’s worth it in the short run. Long NVEC is not without risk as the company has some flaws it needs to address, but the combination of a high dividend, current valuations, chart patterns and the outside possibility that growth has taken off makes NVEC a stock worth betting on.