Nova (NVMI 2.00%) -- formerly Nova Measuring Instruments -- is a small and little-known stock in the semiconductor industry. Despite stiff competition in metrology equipment, which is used in the manufacture of chips, Nova stock is up over 300% in the last five years, including a more than 30% gain so far in 2023.
As chipmaking gets more complicated and expensive, metrology equipment has been a top trend. Is it too late to make an investment in Nova?
Nova's competitive advantage is tech advancement
Metrology (or the science of measurement) and process control equipment is a critical part of semiconductor manufacturing. Think of it as the quality control step when making chips, which is also integral for a silicon wafer and chip packaging company to maintain healthy levels of profitability on its processes.
KLA is the big specialist leader in this niche, and part of what I call the "fab five" -- the five biggest and most important semiconductor manufacturing equipment companies. Along with KLA, they are ASML Holding, Applied Materials, Lam Research, and Tokyo Electron.
But there are other metrology companies. Onto Innovation is a bit bigger than Nova and just behind KLA and Applied Materials (which also has some products in this arena). Smaller than Nova is fellow Israeli metrology specialist Camtek, and tiny Cohu, who also has some measurement equipment.
What's Nova's secret sauce to stand out from the crowd? It focuses on innovation, developing advanced equipment for leading-edge manufacturing processes. This is similar to what has helped Onto gain some traction in this market.
Nova's biggest market is Taiwan, which made up one-third of sales in 2022. Its biggest customer last year represented 23% of sales, which seems to imply it's none other than chipmaking giant Taiwan Semiconductor Manufacturing that Nova has come to rely on. Indeed, the company recently said some of its most advanced equipment for chip packaging was selected by "one of the world's leading foundry manufacturers" -- possibly TSM. Onto also made a similar announcement for its equipment used in advanced chip packaging.
Is Nova stock a buy now?
After a hot run in sales and free cash flow over the last five years, Nova is now taking a breather. In line with manufacturing equipment companies overall, revenue is down 8% through the first half of 2023 to $255 million. Despite this, free cash flow came in at $41 million, up 37% from the first half of 2022.
Nova hasn't provided specific long-term growth goals, outside of a general $1 billion revenue target by 2027 (roughly double from what the business is on track to bring in this year). But the metrology market is sure to heat back up in 2024. Dozens of new chip fabs around the globe are under construction or expanding, and will need to ramp up production once they open. Metrology and process control solutions are especially important during the early stages of manufacturing ramp-up.
For what it's worth, Wall Street analysts predict Nova's sales will return to a mid-teens percentage growth rate starting next year, and could continue through 2026, with earnings per share roughly following suit.
Nova stock currently trades for about 25 times the current year's expected earnings per share, or about 21 times the expected earnings in 2024. If it can keep up with the growth of the semiconductor manufacturing equipment industry, it could be a solid small-cap stock bet right now. It's on my watch list, and could join KLA and Onto to make a little basket of metrology equipment stocks in this top growth niche of the semiconductor stock universe.
