Steady Yields, Shaky Growth: NVE Corporation's Spin On The Semi Market

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NVE Corporation offers solid financials and reliable dividends but faces growth challenges due to recent revenue decline and a volatile semiconductor market.Spintronics technology, including GMR and ...

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recent investments may not yield immediate returns.Given the uncertain growth outlook and semiconductor market slump, I recommend holding NVE stock while monitoring future developments in spintronics demand.   zbruchThesis NVE Corporation (NASDAQ:NVEC), a spintronics pioneer that’s been around since 1989, is about to unveil its Q2 2025 earnings tomorrow, October 16, 2024. Now, on paper, everything looks good—solid financials, impressive margins, and dividends that investors can count on like clockwork. However, the company’s growth story seems a bit murkier: recent revenue has been on a slight downward drift, and the ever-volatile semiconductor market isn’t exactly making things easy, which makes me think investors should seriously consider balancing NVE’s long-term potential with its innovative tech against the current market challenges. Spintronics Technology Overview NVE Corporation, under the helm of CEO Dr. Daniel Baker, is a modestly sized outfit, employing around 54 people, and has been quietly doing its thing since 1989 from the unlikely tech hub of Eden Prairie, Minnesota. The company’s specialty is Spintronics. Now, for those not entirely up to speed on the finer points of nanotechnology, spintronics deals with the rather clever idea of using the spin of electrons to process and transmit information. It’s a fascinating field, if you’re into that sort of thing, and NVE has been putting it to practical use by developing all sorts of gadgets, like sensors and couplers, which find their way into everything from factory automation systems to industrial networks, and even medical devices. Core Spintronics Technologies NVE’s spintronic devices rely on two key technologies: Giant Magnetoresistance (GMR) and Tunneling Magnetoresistance (TMR). These help the products detect magnetic fields and measure resistance changes with high accuracy. This is huge for saving power and ensuring reliable data. You’ll find these devices in industries like robotics and autonomous systems, where precise data matters most. Applications of Spintronics NVE’s new-generation spintronics solution has attracted an astonishing number of customers in fields such as industrial automation, medical technology, and the military. Businesses such as Cypress and Freescale have followed suit, adopting NVE’s ingenious spintronics to create what they’ve dubbed Magnetoresistive Random-Access Memory, or MRAM for short. This new memory is faster, stronger, and more power-efficient than other types of memory, so it's a potential paradigm shifter for many use cases. Advantages in Mobile and Defense Spintronics revolutionizes all of our hyperefficient, high-performance technology, from smartphones to artificial intelligence chips and space platforms. MRAM, for instance, reduces CPU load, resulting in less heat and lighter designs – great news for mobile phones demanding high performance with long battery lives. But it is equally great in sectors that require high-performance, energy-efficient electronics, particularly in environments such as space or military. These devices operate under harsh conditions of temperature, magnetic fields, and radiation, making them an excellent candidate for defense and aerospace. Long-Term Spintronics Potential Spintronics could eventually rival semiconductors of today. It requires less power, scales, and will work with current chip-design techniques, which means it could be replacing or coexisting with legacy technologies in the future. Overall, spintronics might lead to breakthroughs, as semiconductor memory did decades ago. This will be hugely influential for quantum computing, the Internet of Things, and AI tech going forward. Performance Snapshot Since FY2016 FAST GraphsA quick personal flashback: during my high-frequency trading days with RBC from 2004 to 2011, NVEC was a common trade for us due to its volatility. This brings me to its more recent performance. I’ve captured its performance from FY2016 to provide a snapshot of its potential. While extending this to a 20-year time frame shows even stronger stats, I thought it would be more helpful to meet investors and potential investors halfway to give a clearer general picture. FAST GraphsOver the past nine years, NVE Corporation has had some good points but also some weaknesses. When it comes to overall returns, it hasn’t done as well as the broader market, like the SPY index. NVEC’s yearly return, not counting dividends, is just 1.46%, which is much lower than SPY’s 11.45%. The difference gets even bigger when you include growth and dividends. NVEC’s growth rate is 5.70%, while SPY’s is 12.44%. So, while NVEC provides steady returns, it doesn’t grow as much as you’d expect compared to the broader market. FAST GraphsNVEC has managed to carve out a niche by doing one thing very well: paying dividends. For the last nine years, they’ve dished out a steady $4.00 per share, like clockwork with the yield on cost—a respectable 5.78%—is enough to get the attention of cautious investors who’d rather sit back and watch their money grow than take any wild risks. But I've come across some comments from investors who think NVEC is being too generous with the dividends and that the money could be better spent chasing growth. But in truth, NVEC’s solid average dividend growth rate of 10.46% speaks to its healthy cash flow, with a compound growth rate of 7.65% that even manages to beat out the SPY’s 6.28%. Q2 2025 Earnings Preview As of now, NVEC is set to release its Q2 2025 earnings tomorrow (10/16/2024) after the market closes, so let's take a quick look at how they're doing and what we might expect to learn. Despite a 23% drop in total revenue during Q1, there was a solid bright spot—contract research and development revenue jumped 28%. These (contract) projects often tap into NVE’s expertise in spintronics and nanotechnology, helping clients solve engineering problems or develop cutting-edge tech. So instead of selling products, the revenue here comes from offering high-end research services. Building on this positive development, another key win from Q1 was the significant boost in gross margin, climbing to 86% from 77% last year, thanks to a more profitable product mix and a stronger emphasis on direct sales. Semiconductor Industry Recovery Another heartening sign for NVE is the much-anticipated recovery of the semiconductor industry, which, it has to be said, hasn’t been particularly kind to their product sales of late. It’s expected to bounce back through the end of 2024, with management already waving the flag for strong growth in 2025. This year, the semiconductor market is expected to expand by a rather healthy 16-20%, reaching a tidy sum of around $611 billion by year’s end. Some forecasts suggest they’ll surge 76%, largely thanks to the insatiable appetites of AI and high-performance computing. As for geography, the Americas and Asia-Pacific regions are set to enjoy the lion’s share of the growth, with double-digit gains. Europe and Japan, on the other hand, will probably have to content themselves with more modest increases. Looking ahead to 2025, the recovery is expected to continue with an additional 12-13% growth, bringing the market up to nearly $687 billion. This sustained surge will largely be driven by the Memory and Logic segments—both riding high on the back of AI integration. Future Growth and Investments In the meantime, NVE is planning for growth, committing $4-5 million to capital investment over the next two years (arguably small given the dividend ratio and considering the time frame, in my opinion) to increase its manufacturing capacity. It’s about wafer-level chip-scale packaging, which could provide new revenue streams and margins. Customer interest in these products is already being registered by management, which makes a solid proposition for future sales. In addition to manufacturing, NVE is scaling its sales and marketing, hiring new employees, and attending key trade shows in the industry. Plus, with a 26% increase in R&D investment and the introduction of new evaluation boards, NVE is already aggressively focusing on innovation and preparing for further product releases, which should contribute to long-term sales. Finally, NVE’s growth outlook gets another boost from its expanding defense-related product line. The company expects this sector to stay strong, especially with its Physical Unclonable Functions (PUFs), which are in high demand as more focus shifts to autonomous defense systems and anti-tamper tech. This ongoing demand suggests stable, if not increasing, revenue in this area. NVEC's Valuation FAST GraphsTo assess NVEC's valuation, I substituted the missing Adjusted (Operating) Earnings Growth Rate on Fast Tracks by calculating the compound annual growth rate (CAGR) of the company's Operating Income from 2015 to 2024, which resulted in approximately -1.08%. NVEC Income Statement (Seeking Alpha)In place of a blended P/E ratio, I used NVEC's current P/E (TTM) of 22.90. That’s higher than its fair value of 15.00x but lower than its usual 26.39x and immediately suggests some undervaluation, though it also shows investors expect future growth. The issue? Having a high P/E ratio while growth is shrinking? That’s a warning sign. On the bright side is the dividend yield I mentioned earlier at 5.03%, which is solid for income-seekers. NVEC has very low debt, with a debt-to-capital ratio of 0.20%, giving it maximum flexibility in payouts. NVEC’s market cap is $384.08 million, making it a smaller player with only 54 employees in a highly competitive semiconductor industry. Being small has its perks, like agility in niche markets, but NVEC may not have the muscle to overcome broader growth challenges. And since we’re on the subject of small, although it may or may not matter, its website is rocking that late 90s, early 2000s vibe and is long overdue for a modern upgrade if it wants to match that \"disruptive\" image. Anyways, aesthetic opinion aside, with a total enterprise value (TEV) of $363.12 million, its valuation leans on equity, not debt, and that’s good for its balance sheet. But a strong balance sheet alone won’t drive long-term growth. Risks and Market Challenges That said, several bearish factors are cooling the optimism around NVE's performance. It's worth repeating that total revenue dropped 23%, with product sales down 24%, highlighting the challenges from the semiconductor slump and high inventory levels. Despite strong margins, total expenses went up 3%. And those R&D costs that surged 26%, and selling, general, and administrative expenses that climbed 14%—they could come back and squeeze future profits. Furthermore, net income dropped 7%, showing the hit from lower revenues despite a higher gross margin and a favorable tax rate. The slump in the semiconductor industry, along with high distributor inventory levels, continues to be a major drag on NVE's core business. Although the company plans to invest $4-5 million to expand manufacturing, there’s a risk this move won’t lead to immediate revenue growth since customer orders for the new wafer-level chip-scale products haven't come in yet. Final Takeaway  I'd call this stock a solid 'Hold.' Now, don't get me wrong—NVE Corporation is doing fine financially. They’ve got solid margins, a reliable dividend, and nothing scary popping up on the balance sheet. That said, their growth outlook is pretty cloudy right now, revenue’s dipped, and the semiconductor market isn’t exactly running full steam. Yes, their spintronics tech is cool and has big potential down the road, but with no clear sign of strong customer demand just yet, jumping in headfirst doesn’t seem like the best move right now.","kind":"highlight","is_publish_news":true,"is_publish_highlight":false,"is_publish_live":false,"is_publish_wemedia":null,"editions":null,"column":"","sentiment":"0","news_tag":"analysis","news_rank":0,"symbols":[],"gpt_button":1},"commentList":[],"isCommentEnd":true,"newsSizeData":{"likeSize":0,"commentSize":0,"repostSize":0,"favoriteSize":0,"likeStatus":false,"favoriteStatus":false},"APP":{"userAgent":"Mozilla/5.0 AppleWebKit/537.36 (KHTML, like Gecko; compatible; ClaudeBot/1.0; +claudebot@anthropic.com)","isDev":false,"isTTM":true,"deviceId":"web-server-community-laohu8-v3","version":"4.29.4","shortVersion":"4.29.4","platform":"web","vendor":"web","appName":"ttm","isIOS":false,"isAndroid":false,"isTiger":false,"isTHS":false,"isWeiXin":false,"isWeiXinMini":false,"isWeiBo":false,"isQQ":false,"isBaiduSwan":false,"isBaiduBox":false,"isDingTalk":false,"isToutiao":false,"isOnePlus":false,"isHuaWei":false,"isXiaomi":false,"isXiaomiWebView":false,"isOppo":false,"isVivo":false,"isSamsung":false,"isMobile":false},"href":"/m/news/2475988955"}