Is IPG Photonics Stock A Buy?

Fiber lasers don’t get a lot of media attention. Like other critical components of advanced manufacturing processes, they stay in the background while the finished products are pushed front and center. However, the development of fiber lasers has transformed a variety of industries, from micromachining and materials processing to telecommunications and medicine. 

These specialized lasers generate a range of wavelengths, so they can be used for cleaning, texturing, drilling, cutting, welding, and marking – among other applications.

They are preferred because they are exceptionally precise, as the laser beam is straighter and smaller than other types of lasers. Better still, they are relatively low maintenance, and they tend to be less expensive to operate. 

IPG Photonics (IPGP) is widely considered the best in the business when it comes to fiber lasers – and it has been a market leader for decades. However, in recent months, IPG Photonics stock has lost value. In fact, it is down nearly 30 percent year-to-date. 

One of the largest drops occurred after its second-quarter earnings call, which was held in early August – and it’s true, the company’s results were disappointing. However, prospects appear promising. With share prices near 12-month lows, is IPG Photonics stock a buy? 

IPG Photonics Earnings: “Good” Or Were They?

Executive Chairman Valentin Gapontsev appeared in high spirits when he launched IPG Photonics second-quarter earnings call. He said: 

We are pleased to report another good quarter for IPG. Our second-quarter revenue was significantly above the same period of last year and increased from strong results in the prior quarter…

However, when the leadership team got down to the numbers, analysts immediately realized that “another good quarter” is in the eye of the beholder.

While the company’s revenue did increase by 25 percent for a total of $372 million, analysts were expecting $376.9 million.

More importantly, net income came in at $1.29 per share when analysts had projected $1.40 per share. 

IPGP Powering Innovative New Technologies & Sales

IPG’s ability to grow revenue in the quarter can be credited, in part, to improving global economic conditions. That means increased demand for the company’s core materials processing products.

Specifically, fiber lasers are effectively replacing handheld welders and other traditional tools, both in developed markets and in emerging markets. 

Though replacement of outdated tools is certainly one way in which IPG can continue to grow its business, it is deep into the exploration of new applications for fiber laser technology. Examples include microprocessing, electric vehicle battery production, and medical devices. 

The precision of fiber lasers is driving innovation. IPG Photonics is making smaller, more complex devices possible, and it is delivering advanced manufacturing capabilities to the renewable energy and electric vehicle industries. 

Sales of these types of emerging products increased by 47 percent year-over-year, accounting for 29 percent of sales. That’s an increase from the previous year’s 25 percent, which bodes well for the future of IPG Photonics’ stock. 

China Exposure Looms Large

At the moment, IPG relies on China for a large portion of total revenue. In the second quarter, revenue in China represented 43 percent of sales, which represents a 10 percent increase year-over-year.

While the Chinese market is an important opportunity for IPG, it also carries a significant amount of risk for two reasons. 

First, there are ongoing concerns about whether and how the Chinese economy will grow, near-term. Between regulatory changes and issues with the health of certain key companies and their larger industries, it is possible that China is headed for an economic downturn. If so, that could reduce demand for IPG products in this critical market. 

Second, demand in the Chinese market is heavily dependent on pricing, and IPG doesn’t win in pricing wars. IPG products are well-known to offer superior quality and capabilities as compared to their less expensive Chinese counterparts, but that doesn’t always translate to higher sales. 

IPG Photonics Third-Quarter Guidance 

In developing third-quarter guidance, IPG’s management noted that they expect China’s cutting market to soften. In addition, supply chain constraints are limiting growth to some extent, which further impacts expected third-quarter revenues. 

IPG leadership stated that revenue is expected between $350 million and $380 million for the third quarter. At the midpoint, this represents year-over-year growth of 15 percent. Earnings per share are expected to come in between $1.10 and $1.40. 

Is IPG Photonics a Buy?  

Emerging products contribute less than 10 percent of IPG Photonics’ total revenue right now, but the opportunity presented by these innovations has many investors and analysts excited.

Examples of products that fall into this category include certain high-power pulse lasers, a line of green products, ultrafast lasers, and advanced telecom applications. 

Between these emerging products, strengthening economic conditions, and IPG Photonics’ clearly superior quality and performance, analysts expect growth in the next 12 months. Most currently suggest that IPG stock is a hold, but there is a solid contingent that states IPG stock is a buy. 

When we examine the projections based on a standard discounted cash flow forecast analysis, we see that IPGP share price forecast has significant upside potential to $218 per share from current levels. In short, the selloff in IPGP shares over recent months is teeing up an opportunity for value hunters who like to scoop up a bargain.

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The author has no position in any of the stocks mentioned. Financhill has a disclosure policy. This post may contain affiliate links or links from our sponsors.