Nova (NASDAQ:NVMI) Exceeds Q2 Expectations But Inventory Levels Increase

Anthony Lee /
2023/08/03 7:56 am EDT

Semiconductor quality control company Nova (NASDAQ: NVMI) reported results in line with analysts' expectations in Q2 FY2023, with revenue down 13.4% year on year to $122.7 million. The company also expects next quarter's revenue to be around $122.5 million, roughly in line with analysts' estimates. Nova made a GAAP profit of $29.9 million, down from its profit of $34.9 million in the same quarter last year.

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Nova (NVMI) Q2 FY2023 Highlights:

  • Revenue: $122.7 million vs analyst estimates of $121.7 million (0.83% beat)
  • EPS (non-GAAP): $1.06 vs analyst estimates of $1 (5.52% beat)
  • Revenue Guidance for Q3 2023 is $122.5 million at the midpoint, roughly in line with what analysts were expecting
  • Free Cash Flow of $20.9 million, similar to the previous quarter
  • Inventory Days Outstanding: 256, up from 227 in the previous quarter
  • Gross Margin (GAAP): 56.8%, in line with the same quarter last year

"Nova's results for the quarter met our expectations, highlighting the resilience of our portfolio, our wide exposure to new advanced applications, a well-maintained operational model, an effective combination of customers' focus and our roadmap of continuous investment in every division," said Gaby Waisman, President and CEO.

Headquartered in Israel, Nova (NASDAQ: NVMI) is a provider of quality control systems used in semiconductor manufacturing.

The semiconductor industry is driven by demand for advanced electronic products like smartphones, PCs, servers and data storage. The growth of data and technologies like artificial intelligence, 5G networks and smart cars are also creating a next wave of growth for the industry. To keep up with ever changing customer needs requires new tools that can design, fabricate and test at ever smaller sizes and more complex architectures, and that is driving the demand for semiconductor capital manufacturing equipment.

Sales Growth

Nova's revenue growth over the last three years has been very strong, averaging 34% annually. But as you can see below, its revenue declined from $141.6 million in the same quarter last year to $122.7 million. Semiconductors are a cyclical industry, and long-term investors should be prepared for periods of high growth followed by periods of revenue contractions (which can sometimes offer opportune times to buy).

Nova Total Revenue

Even though Nova surpassed analysts' revenue estimates, this was a slow quarter for the company as its revenue dropped 13.4% year on year. This could mean that the current downcycle is deepening.

Nova's revenue growth has decelerated over the last three quarters and its management team projects growth to turn negative next quarter. As such, the company is guiding for a 14.9% year-on-year revenue decline while analysts are expecting a 3.41% drop over the next 12 months.

The pandemic fundamentally changed several consumer habits. There is a founder-led company that is massively benefiting from this shift. The business has grown astonishingly fast, with 40%+ free cash flow margins. Its fundamentals are undoubtedly best-in-class. Still, the total addressable market is so big that the company has room to grow many times in size. You can find it on our platform for free.

Product Demand & Outstanding Inventory

Days Inventory Outstanding (DIO) is an important metric for chipmakers, as it reflects a business' capital intensity and the cyclical nature of semiconductor supply and demand. In a tight supply environment, inventories tend to be stable, allowing chipmakers to exert pricing power. Steadily increasing DIO can be a warning sign that demand is weak, and if inventories continue to rise, the company may have to downsize production.

Nova Inventory Days Outstanding

This quarter, Nova's DIO came in at 256, which is 86 days above its five-year average, suggesting that the company's inventory has grown to higher levels than we've seen in the past.

Key Takeaways from Nova's Q2 Results

With a market capitalization of $3.48 billion, Nova is among smaller companies, but its $129.2 million cash balance and positive free cash flow over the last 12 months give us confidence that it has the resources needed to pursue a high-growth business strategy.

We enjoyed seeing Nova exceed analysts' earnings expectations this quarter. We were also happy that its revenue growth outperformed Wall Street's expectations, even if just narrowly. On the other hand, its inventory levels materially increased and its operating margin declined. Overall, this was a mixed quarter for Nova. The stock is up 1.21% after reporting and currently trades at $122.97 per share.

So should you invest in Nova right now? When making that decision, it's important to consider its valuation, business qualities, as well as what has happened in the latest quarter. We cover that in our actionable full research report which you can read here, it's free.

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The author has no position in any of the stocks mentioned in this report.