Shares of chip equipment vendor Ultratech (UTEK) are down about 39% year to date, which compares very poorly to the NASDAQ, up 7.33% during that time. The company has very heavy exposure to the capital expenditure plans of the major semiconductor logic foundries such as GLOBALFOUNDRIES, Samsung (NASDAQOTH: SSNLF), and others.

The reason the story hasn't been working is simple: Ultratech had repeatedly expected orders related to the manufacture of next-generation chip technologies known as FinFETs. Unfortunately for Ultratech, until those foundries can get their 14/16-nanometer FinFET technologies to yield, they're not going to purchase equipment to support production.

This has hurt Ultratech and its share price, but I think the risk/reward at this point may be too compelling to ignore.

The yield issues still persist, but...
An important thing to understand about the Ultratech story is that the yield problems at 14/16-nanometer, according to the company, still persist. Ultratech pointed out on its earnings call that it is "projecting that LSA orders will begin in the fourth quarter" based on both a "gradual FinFET ramp and the expansion plans for both the 20 nanometer and 28 nanometer nodes."

The uncertainty around foundry FinFET yields undoubtedly serves to make trying to project revenues out over the next quarter or two difficult. However, what makes the story extremely interesting is that any potential revenue rebound is no longer solely dependent on the FinFET ramp from this point on: The capacity expansion story at 28-nanometers, and 20-nanometers could be what makes this story work.

Taking a closer look at the 28-nanometer and 20-nanometer story
On the call, management pointed out that there continues to be a "need for chips" as a result of the growth in mobile products. This "need" is reportedly now being met through "increased production" of 28-nanometer and 20-nanometer devices.

Interestingly enough, the 28-nanometer manufacturing technology is widely expected to be the "optimal cost per transistor" technology for many years to come. This could mean the vast majority of logic devices will be built on this technology rather than on the 20-nanometer or 14/16-nanometer FinFET nodes for the foreseeable future.

In fact, Ultratech expects that the 28-nanometer node "will not reach its peak until 2017" and projects 50% growth in demand for 28-nanometer wafers. Furthermore, Ultratech's CEO pointed out that once demand for 28-nanometer begins to taper off (beginning in 2018), the "second tier" foundries could start adding 28-nanometer capacity, driving further sales of the company's laser spike annealing, or LSA, tools.

At these prices, I'll buy the 28/20 story, with 14/16-nanometer as optionality
With Ultratech stock trading at about $17.70 per share as of this writing, and with the company rocking about $9.43 in net cash on the books, the underlying business appears to be valued at $7.41 per share. While the company is clearly losing money today, I think once the LSA orders start coming in, the company's financials should rebound nicely.

In fact, depending on the timing and magnitude of the 28/20-nanometer related orders, Ultratech's financials could rebound significantly on the back of 28/20-nanometer capacity expansion, and any further upside from 14/16-nanometer could be viewed as a bonus. That said, I hope Ultratech will give some additional details at its analyst day, scheduled for Nov. 18. 

Foolish bottom line
Ultratech has been a frustrating story, particularly as its problems seem largely out of the company's control. However, If what management has signaled about 28/20-nanometer capacity expansions is true, and if revenue from that turns out to be significant, then the risk/reward at these levels looks attractive.

For investors with the patience to wait for those orders to come in, as well as the risk tolerance required to invest in small-cap technology stocks, the Ultratech story may finally be worth a look.