Nlight – laser-focused ipo – nlight, inc. (nasdaq lasr) seeking alpha electricity omd

nLight ( LASR) has gone public in an offering which was very well received, even as some of its peers have seen some pressure on their share price as of recent, in generally a reaction to strong multi-year momentum runs seen in recent years.

nLight provides high-power semiconductor and fiber lasers, while operating in a vertically-integrated business model which gives the company full control over the entire process. Particularly interesting is the fact that the company’s lasers are replacing legacy lasers. This continued trend has been driven by a reduction in the cost per brilliant watt, in what the company describes is a trend similar to Moore’s Law.

Founded in 2000, the company has grown to an employee count of 1,000 workers spread across the US, Finland and China. The advancement of fiber lasers over traditional solutions are plentiful including lower cost of production, greater flexibility, greater precision and ability to operate in a much smaller space/size.

This makes that the company operates in a rapidly growing segment. The overall laser segment will grow from roughly $10 billion in 2015 to $15 billion in 2020, yet the market for semiconductor and fiber lasers are expected to nearly double to $4.2 billion over this same time frame. The Offering & Valuation

nLight sold 5.4 million shares at $16 per share, which was already $2 above the preliminary offering range, allowing the company to rake in $86 million in gross proceeds in connection to the offering. The 33 million shares outstanding are thereby valued at $548 million at the offer price.

The company only reported its full year results for 2016 and 2017 in the S1-filing as I have not been able to find older financial information. The company reported an operating loss of $9 million on sales of $101 million in 2016. Revenues jumped to more than $138 million in 2017 as strong operating leverage resulted in the fact that losses disappeared and in fact a $10 million operating profit showed up.

Growth trends have been quite reassuring throughout 2017. First quarter sales rose by 35% to $29.9 million, as the company posted operating profits of $0.6 million. Growth accelerated to 40% in the second quarter as sales hit $34.7 million with operating earnings advancing to $1.9 million. Growth came in at 41% in Q3 as the company posted very strong operating earnings of $4.6 million on $36.5 million in sales, although the earnings number received a $1 million boost from a previously reserved receivable. Growth slowed down a bit to 31% in the final quarter of the year as sales were trending at $150 million a year, as the slower pace of growth is a small worry.

Nonetheless, the company would trade at 3 times annualised sales based on the offer price, which seems very reasonable given the growth. With operating earnings trending at a rate in excess of $10 million, earnings multiples remain elevated nonetheless.

The preliminary first quarter results for 2018 are comporting in this perspective. First quarter sales growth is set to accelerate again towards 40%, with revenues seen at $42 million, plus or minus a million. That should result in operating earnings anywhere between $3.5 million and $5.0 million. If annualised, these numbers suggest $170 million in sales and operating profits of $14-20 million.

This suggests that operating assets are valued at just 2.7 times sales and 26 times operating earnings (at the midpoint), based on the offer price. After applying taxes of 20% on the midpoint of operating earnings, earnings multiples come in at 33 times. While that is high, reality is that operating leverage being delivered upon is very strong as well, while top line sales are growing at 40%!

This is a typical IPO in which I would be very interested to buy at the offer price, yet when writing this I see shares already trading at $25 per share. That has pushed up the valuation towards $825 million, or a hundred million less if net cash is accounted for, which is equivalent to 4.2 times annualised sales based on the preliminary first quarter results.

The company has quite a few publicly traded competitors which have enjoyed a great momentum run in recent years, offset by a correction in recent times. These publicly traded competitors include II-VI ( IIVI), IPG Photonics ( IPGP) and Coherent ( COHR), among others.

To put the numbers into perspective. II-VI is valued at $2.7 billion, equivalent to a 2.5 times sales multiple. Operating margins come in around 10% as well, similar to nLight, as growth of 20% on an annual basis comes in at roughly half the pace reported by nLight.

IPG, another favourite of mine, is valued at roughly $10.5 billion valuation if net cash is included, which translates into a 7.5 times sales multiple. Just like nLight, it too grows its sales by 40% per year. There is a big caveat however, IPG posts operating margins of roughly 40%, roughly 4 times the margins posted by nLight, which makes sales multiple comparisons not that meaningful.

The quick discussion above shows that the valuation of nLight looks perhaps reasonable and would probably represent a bargain at the offer price of $16, yet at $25 per share I would be a bit more cautious as shares of many competing firms have seen a big correction in recent times, notably Coherent.

Like many of its peers, the main risk relates to the cyclical swings in the industry and high fixed costs, which makes that swings in demand show up heavily on the bottom line. Another risk is the fact that the company has sizeable operations in China both in terms of operations and sales. Customer concentration remains a point which deserves attention as well, as the top 10 customers combined make up 60% of sales.