Is nLight Stock A Buy?

When you think of lasers and directed energy, you might think of a scene from a movie like Star Wars. But lasers and other forms of directed energy are more than just science fiction; they are the future today.

Founded in 2000, this Vancouver, Washington-based company provides semiconductors and fiber-based lasers for various applications in the aerospace and defense industries. Government contracts create a steady and predictable flow of sales, so is nLight (LASR) stock a buy? According to the company’s website, they make “the impossible possible.” So, let’s take a look.

What is nLight?

The company is split into two segments: Laser Products and Advanced Development. Most of the company’s revenue is earned through the Laser Product segment. Some of the products offered by nLight include:

• Semiconductor lasers
• Fiber-based lasers
• Directed energy products

nLight has global sales but the top two regions for revenue generation are North America and China, respectively.

The LASR IPO launched in 2018 at $16 per share, raising $96 million. This was on the heels of a $1.8 million profit in 2017 (revenue totaling $138.6 million) and a $14.2 million loss in 2016 (revenue totaling $101.3 million. In 2019 and 2020, the company saw revenues of $176.6 million and $222.8 million, respectively.

nLight’s customers include Samsung and Raytheon (RTX). CEO and co-founder is Scott Keeney.

Secular Industries: What Are They?

nLight is considered a secular stock – what does that mean exactly?

In market-speak, a secular trend or stock is one that’s expected to continue moving in the same trajectory long-term regardless of outside influence or current conditions in the economy. In the stock market, a secular trend is one that’s expected to continue for at least five years and can be either upward- or downward-mobile.

Secular trends are important for investors and analysts to identify. Short-term trends don’t necessarily uncover enough information to base long-term investment decisions on. Secular trending examples include aging populations, technology expansion, energy movements, and impact investment growth.

Other companies, such as Netflix (NFLX) or Google (GOOG & GOOGL), are also considered secular because recent economic trends in the short term have little to no impact on the company’s long-term stock performance. To discern a secular stock, past sales offer a clue.

Capitalizing on secular growth trends is a smart way to invest; it should cushion a portfolio to some extent against downturns. So, as far as secular trend stocks go, how does nLight stack up?

While share prices have risen almost 30% over the past 12 months, this still is far short of market return and long-term return potential is relatively unimpressive – it’s only gained 21% in the last three years.

But on the bright side, nLight shows signs of strength. So, let’s take a look at long-term fundamentals.

nLight for the Long Haul

nLight has had a choppy history of earnings. So, it’s not likely there will be a strong connection between share price and EPS. The next best thing to consider is revenue. Investors with shares in companies that aren’t profitable usually expect revenue to be strong – fast revenue growth can translate to future, often considerable, profits.

On that note, nLight’s revenue grew by 42% in 2020 – that’s impressive. The increase in share price over the same period obviously isn’t horrible, but it’s far from stellar. A much stronger growth was expected – but don’t count the company out just yet. This could turn out to be a stock to watch.

Looking Through a Different Window

No one goes broke while they’re making a profit, right? A share price increase of 29% is still an increase – but the average market increase was 36%.

That said, nLight’s previous three years were much worse, with just a 6% growth each year. This shows that nLight is certainly moving in the right direction – this position is an improvement. Market conditions have been less than favorable over the past 18 months, but there are additional factors a savvy investor should be looking at, too.

nLight Most Recent Earnings Call

Q2 2021 set records for nLight. The company’s $69 million revenue shot past guidance the nLight provided in May. This is a 33% YOY revenue increase driven by demand across the company’s varied market reach.

nLight serves various end markets, including aerospace, defense, and directed energy.

nLight’s revenues in the aerospace and defense category saw a 57% YOY growth, representing 35% total Q2 revenue. The company’s customer base in this sector is strong with many customers having long-term contracts which serves to boost confidence in long-term sustainability and growth potential.

Revenues in Q2 could have seen even more growth had it not been for the company dealing with material shortages and issues with vendor quality. Keeney states that these problems were but temporary and don’t expect the problems to affect the business going forward. In fact, Q2 also brought a new long-term contract worth nearly $50 million. The contract is a renewal of a long-time defense customer.

The directed energy sector continued achieving vital milestones further demonstrating the company’s capabilities with the technology. nLight states these milestones have positioned the company to capitalize on future opportunities.

When breaking down revenue geographically, Q2 sales outside of China saw a record-breaking 64% YOY growth totaling $50.5 million – around 73% of the company’s overall revenue.

Within China, Q2 revenue dropped about 13% YOY to $18.8 million. While nLight continues serving Chinese customers, the company has chosen to be more selective with onboarding new customers and partners in the region to focus more stringently on growing business outside the country.

Overall, nLight’s take is that the company will “outgrow the market” eventually. The company’s key directive at present is growing business outside China in the industrial and aerospace sectors.

Is nLight Stock A Buy?

When compared to the stock market’s overall returns of 36%, nLight’s 29% returns cast an uncertain glow. But as a secular stock, nLight can’t be viewed with the pessimism that’s bogged down so many companies over the last 18 months or so.

Q2 showed some impressive gains and it appears the company has exceptional room to grow, even if certain markets appear to be slowing or changing. 

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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.