Navitas: High Potential For AI Data Centers But Big China Exposure

seekingalpha07-07

Navitas Semiconductor's share price has been declining despite increasing revenues, and the suitability of its power chips for AI data centers.The company specializes in GaN technology for power ...

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23:57 GMT+8&nbsp;&nbsp;&nbsp;<a href=https://seekingalpha.com/article/4702794-navitas-high-potential-for-ai-data-centers-big-china-exposure><strong>seekingalpha</strong></a>\n\n\n</h4>\n\n</header>\n<article>\n<div>\n<p>Navitas Semiconductor's share price has been declining despite increasing revenues, and the suitability of its power chips for AI data centers.The company specializes in GaN technology for power ...</p>\n\n<a href=\"https://seekingalpha.com/article/4702794-navitas-high-potential-for-ai-data-centers-big-china-exposure\">Source 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could impact Navitas' revenue growth and stock performance.The most important risk appears to be connected to the revenue exposure to China in case trade tensions with the U.S. escalate after November's elections.   klmax Navitas Semiconductor's (NASDAQ:NASDAQ:NVTS) share price has followed a downtrend as shown below despite revenues trending higher as per the blue chart.  www.seekingalpha.com This seems illogical and one could be tempted to think that its chips, used in power supplies like those shown in the above picture do not have the same visibility as the GPUs manufactured by Nvidia (NASDAQ:NVDA) which are driving artificial intelligence applications. Still, for the stock to have slid from $20 to about $4, the market may be pricing more risks than rewards, possibly because of its China exposure. This thesis aims to show how it could suffer further implying it is not a buy, but, first, I elaborate on how it could benefit from the proliferation of super-smart apps as more of its chips find their way into the power supplies of data centers specializing in hosting AI workloads.  Leadership in GaN  Founded in 2014, the company develops solutions to improve the energy efficiency and performance of electronic systems based on gallium nitride or GaN power devices. Its products are used in a variety of industries, including battery chargers for telecommunications, and smartphones as well as power supplies for data center power systems. In other words, its technology is applied in situations requiring high power and where efficiency is also a must. Two examples are Chinese smartphone manufacturer Xiaomi (OTCPK:OTCPK:XIACF) whose latest models use Navitas' Gen-4 GaNSense ICs to support ultra-fast charging and Lenovo's (OTCPK:OTCPK:LNVGY) for its latest Thinkbook desktop charger system. The company stands out with its GaN-based ICs (integrated circuits) which make it possible for power devices to be smaller and more efficient than traditional silicon technologies with its capacity to innovate, such as with GaNSlim for under 500 watts applications for home appliances, it has a technological leadership position. Corporate website (navitassemi.com) Currently, the most pressing demand is coming from AI data centers deploying Nvidia’s latest generation GPUs which consume 700 watts to 1,000 watts compared to only 300 to 400 watts for conventional data center processors. This more than doubled power requirements and the problem is that this has been happening in a short period or only about 18 months, from when ChatGPT was launched in November 2022 till now. The challenge is therefore to produce higher-capacity server power supplies that are also more heat-efficient because the GPUs dissipate a lot of heat. To respond to the demand, the company has boosted manufacturing efforts, producing server power supplies of 4.5 kilowatts capacity at 97% efficiency, up from 3.2 kilowatts at 96% efficiency. It is on track to also produce larger capacity devices with 8 kilowatts to 10 kilowatts of capacity at 97% efficiency to be delivered to customers later this year. Faces Near-term Weakness However, designing circuits that exploit GaN design remains complex and can take time explaining why the initial ramp for data center chips will be in Q2. Also, the sale process involves first going through design wins, and Navitas has secured three of these at some of the world’s largest power supply companies. There are also 30 customer projects expected to generate \"multiple millions\" of sales this year followed by \"$10 million to $20 million\" in 2025. Some of the customer names include Amazon's (AMZN) AWS, Microsoft's (MSFT) Azure, Google's (GOOG) GCP, Supermicro (SMCI), Inspur, and Baidu (BIDU).  Moreover, with its GaN technology enabling superfast charging, three times faster than those possible by conventional chips, it is displacing silicon in mobile chargers and expanding into home appliances. With its chips also used in EV, solar, and energy storage segments, Navitas seems to be facing near-term weakness. Hence, sales surged by nearly 110% YoY in FY-2023, but deceleration is expected by analysts for this year with revenue growth of less than 20% as illustrated below in the consensus estimates.  seekingalpha.com The reason according to the management is \"continued softness\" in demand in EV, solar, and industrial markets, all resulting in trimming down growth expectations for the second quarter of 2024 (Q2). Also, this weakness should only be partially offset by gains from mobile and power chips for data centers and has resulted in the topline being revised downwards seven times during the last three months as shown below, prompting Quant to downgrade its rating to Strong Sell. www.seekingalpha.com Moreover, the company does not have \"perfect visibility\" in Q3 which means that headwinds could continue in the second half of 2024. The Big China Exposure  Digging deeper, the company's main market is China accounting for 74% of revenues in Q1, up from 57% during the same period last year as illustrated below. This revenue concentration in China which has benefited the company so well in Q1 could become problematic for two reasons. First, despite growing EV adoption, the is a risk of a potential restructuring of this fiercely competitive industry where there are many players (80K), implying a potential reduction in the number of companies. The risk for the U.S. company is that after an industry consolidation, remaining players could source less from it which may be the reason for the CEO invoking the visibility problem. 10-Q SEC Filings (seekingalpha.com) Second, for solar power generation, while growth continues, it should be far less than the 154% surge last year due to an overcapacity capacity issue, meaning headwinds for solar panel and battery manufacturers that could in turn impact demand for Navitas' chips. These problems could get exacerbated towards the end of this year in the eventuality of rising trade tensions in case the Republican candidate is elected and imposes a 60% tariff on Chinese goods. In this respect, China's restrictions on exports of GaN at the beginning of July  last year more or less coincided with the start of the stock's slide as illustrated in the chart below. Thus, despite providing an update that it would not impacted by these restrictions, and repeatedly beating topline estimates (by eight times during the past eight quarters), Navitas' stock slid from its $10.55 peak as per the chart below. This shows that geopolitical risks could have played a large role in the stock's performance. Additionally, the current U.S. administration is ramping up tariffs on Chinese-made EVs and solar cells which will increase from 25%-50% and 25%-100% in 2024 respectively. Therefore, because of the risk of a tit-for-tat reaction by China and a potential escalation of tensions in the aftermath of the November elections, it is preferable not to invest as volatility could send the stock dangerously close to the $1 level. seekingalpha.com Risks of Share Dilution but Navitas has Potential  Furthermore, investors will note that despite the dip, the company's price-to-sales, both on a trailing and forward basis, remain much higher than the IT sector median which means it is not an opportunity from the valuation standpoint. Therefore, the price could dip further, a possibility hinted at by the momentum, flagged in red. In this case, the price is below the 100-day and 200-day moving averages showing that the downside could continue to below the $4 level. The possibility of a downside is also supported by the RSI of 46 which does not indicate an oversold condition yet.  seekingalpha.com However, investors will note that I am not bearish as, despite the weakness in EVs, solar, and other industrial use cases this is a company whose power chips are in high demand in mobile phones and AI data centers. Talking figures, its customer pipeline surged by nearly 30% from December to $1.6 billion at the end of Q1, or at least twenty times FY-2023's sales of $79.5 million. Therefore, its strategic importance in the AI value chain should provide some support to the price. Also, work-in-progress increased two times from December to the March quarter as per the table below, and shows that Navitas is gearing up to deliver power ICs for data centers.    10-Q SEC Filings (seekingalpha.com) Looking deeper into the income statement, this is a loss-making company that spent 87% of FY-2023's revenues on R&D. The operating loss amounted to $118 million with no progress on the profitability front since the last five years. Also, its EPS for the current financial year has been revised lower showing that things may not improve over the short term. It burnt $41.1 million of cash during the March quarter. Therefore, with $153 million of cash versus only $8.5 million of debt, the cash runway is less than one year at the current cash burn rate. Unless there is a reduction in expenses, it would have to tap the debt market or do an equity offering which would dilute the shares. Now, as per the management, operating expenses will be modest during 2024 and revenue could pick up in FY-25 as it ships enough high-power and energy-efficient chips to offset the weakness seen in other parts of the business. In this respect, it must be mentioned that it faces competition from others like GaN Systems which also develops chips for chargers, data centers power systems, and EVs. More importantly, there is Infineon (OTCQX:IFNNY), a much larger company boasting $49 billion in market cap which could pose a threat to Navitas' technological leadership with its relatively higher R&D spend. However, the GaN semiconductor device market is growing rapidly and its size should reach $33 billion by 2031, with Navitas demonstrating agility in rapidly developing power ICs for AI data centers. In this case, given the billions of dollars of GPUs that are being poured into Nvidia's silicon and the need to house them in data centers within a relatively short period, I believe it will be more of a supply problem than a demand one. Ultimately, achieving the expected sales numbers will depend on how fast the company can ramp. Finally, Navitas' chips are key to fast charging as part of the electrification process and it has started to benefit from the proliferation of super smart apps. Also, its ICs gaining traction in the data centers of U.S. hyperscalers could reduce the revenue concentration issue, but, one cannot remain insensible to the risks related to its China exposure, especially in an election year. This is the reason for my Hold position.  Editor's Note: This article discusses one or more securities that do not trade on a major U.S. exchange. 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