IPG Photonics (IPGP)

Fiber laser manufacturer IPG Photonics (NASDAQ:IPGP) beat Wall Street’s revenue expectations in Q3 CY2025, with sales up 7.6% year on year to $250.8 million. Guidance for next quarter’s revenue was better than expected at $245 million at the midpoint, 1.1% above analysts’ estimates. Its non-GAAP profit of $0.35 per share was 78.8% above analysts’ consensus estimates.

Company Overview

Both a designer and manufacturer of its products, IPG Photonics (NASDAQ:IPGP) is a provider of high-performance fiber lasers used for cutting, welding, and processing raw materials.

Competitors offering laser products for materials processing include Coherent (NASDAQ:COHR), Laserline, Lumentum (NASDAQ:LITE), and Maxphotonics.

A company’s long-term sales performance is one signal of its overall quality. Any business can experience short-term success, but top-performing ones enjoy sustained growth for years. Over the last five years, IPG Photonics’s demand was weak and its revenue declined by 3.8% per year. This was below our standards and suggests it’s a low quality business. Semiconductors are a cyclical industry, and long-term investors should be prepared for periods of high growth followed by periods of revenue contractions.

We at StockStory place the most emphasis on long-term growth, but within semiconductors, a half-decade historical view may miss new demand cycles or industry trends like AI. IPG Photonics’s recent performance shows its demand remained suppressed as its revenue has declined by 14.6% annually over the last two years.

This quarter, IPG Photonics reported year-on-year revenue growth of 7.6%, and its $250.8 million of revenue exceeded Wall Street’s estimates by 5%. Adding to the positive news, IPG Photonics’s growth inflected positively this quarter, news that will likely give some shareholders hope. Company management is currently guiding for a 4.6% year-on-year increase in sales next quarter.

Looking further ahead, sell-side analysts expect revenue to grow 4.1% over the next 12 months. Although this projection suggests its newer products and services will catalyze better top-line performance, it is still below the sector average.

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.

This quarter, IPG Photonics’s DIO came in at 194, which is 15 days below its five-year average. These numbers show that despite the recent increase, there’s no indication of an excessive inventory buildup.

In the semiconductor industry, a company’s gross profit margin is a critical metric to track because it sheds light on its pricing power, complexity of products, and ability to procure raw materials, equipment, and labor.

IPG Photonics’s gross margin is one of the worst in the semiconductor industry, signaling it operates in a competitive market and lacks pricing power. As you can see below, it averaged a 36.6% gross margin over the last two years. Said differently, IPG Photonics had to pay a chunky $63.36 to its suppliers for every $100 in revenue.

In Q3, IPG Photonics produced a 39.5% gross profit margin, marking a 16.3 percentage point increase from 23.2% in the same quarter last year. IPG Photonics’s full-year margin has also been trending up over the past 12 months, increasing by 3.9 percentage points. If this move continues, it could suggest better unit economics due to more leverage from its growing sales on the fixed portion of its cost of goods sold (such as manufacturing expenses).

Operating margin is one of the best measures of profitability because it tells us how much money a company takes home after procuring and manufacturing its products, marketing and selling those products, and most importantly, keeping them relevant through research and development.

Although IPG Photonics was profitable this quarter from an operational perspective, it’s generally struggled over a longer time period. Its expensive cost structure has contributed to an average operating margin of negative 8.5% over the last two years. Unprofitable semiconductor companies require extra attention because they could get caught swimming naked when the tide goes out. It’s hard to trust that the business can endure a full cycle.

Looking at the trend in its profitability, IPG Photonics’s operating margin decreased by 21.8 percentage points over the last five years. IPG Photonics’s performance was poor no matter how you look at it - it shows that costs were rising and it couldn’t pass them onto its customers.

In Q3, IPG Photonics generated an operating margin profit margin of 3.1%, up 111.8 percentage points year on year. The increase was solid, and because its operating margin rose more than its gross margin, we can infer it was more efficient with expenses such as marketing, R&D, and administrative overhead.

Revenue trends explain a company’s historical growth, but the long-term change in earnings per share (EPS) points to the profitability of that growth – for example, a company could inflate its sales through excessive spending on advertising and promotions.

Sadly for IPG Photonics, its EPS declined by 20% annually over the last five years, more than its revenue. This tells us the company struggled because its fixed cost base made it difficult to adjust to shrinking demand.

Diving into the nuances of IPG Photonics’s earnings can give us a better understanding of its performance. As we mentioned earlier, IPG Photonics’s operating margin expanded this quarter but declined by 21.8 percentage points over the last five years. This was the most relevant factor (aside from the revenue impact) behind its lower earnings; interest expenses and taxes can also affect EPS but don’t tell us as much about a company’s fundamentals.

In Q3, IPG Photonics reported adjusted EPS of $0.35, up from $0.29 in the same quarter last year. This print easily cleared analysts’ estimates, and shareholders should be content with the results. Over the next 12 months, Wall Street expects IPG Photonics’s full-year EPS of $1.14 to grow 27.7%.

Free cash flow isn't a prominently featured metric in company financials and earnings releases, but we think it's telling because it accounts for all operating and capital expenses, making it tough to manipulate. Cash is king.

IPG Photonics has shown weak cash profitability over the last two years, giving the company limited opportunities to return capital to shareholders. Its free cash flow margin averaged 10.8%, subpar for a semiconductor business.

Taking a step back, we can see that IPG Photonics’s margin dropped by 15.1 percentage points over the last five years. This along with its unexciting margin put the company in a tough spot, and shareholders are likely hoping it can reverse course. If the trend continues, it could signal it’s in the middle of a big investment cycle.

IPG Photonics’s free cash flow clocked in at $14.58 million in Q3, equivalent to a 5.8% margin. The company’s cash profitability regressed as it was 12.6 percentage points lower than in the same quarter last year, suggesting its historical struggles have dragged on.

EPS and free cash flow tell us whether a company was profitable while growing its revenue. But was it capital-efficient? A company’s ROIC explains this by showing how much operating profit it makes compared to the money it has raised (debt and equity).

IPG Photonics historically did a mediocre job investing in profitable growth initiatives. Its five-year average ROIC was 4.8%, lower than the typical cost of capital (how much it costs to raise money) for semiconductor companies.

Businesses that maintain a cash surplus face reduced bankruptcy risk.

IPG Photonics is a profitable, well-capitalized company with $870.4 million of cash and no debt. This position is 24% of its market cap and gives it the freedom to borrow money, return capital to shareholders, or invest in growth initiatives. Leverage is not an issue here.

It was good to see IPG Photonics beat analysts’ EPS expectations this quarter. We were also excited its adjusted operating income outperformed Wall Street’s estimates by a wide margin. On the other hand, its inventory levels materially increased. Zooming out, we think this quarter featured some important positives. The stock remained flat at $85.27 immediately following the results.

Updated: December 3, 2025 at 9:31 PM EST

Before making an investment decision, investors should account for IPG Photonics’s business fundamentals and valuation in addition to what happened in the latest quarter.

IPG Photonics doesn’t pass our quality test. For starters, its revenue has declined over the last five years. On top of that, IPG Photonics’s declining EPS over the last five years makes it a less attractive asset to the public markets, and its cash profitability fell over the last five years.

IPG Photonics’s P/E ratio based on the next 12 months is 59.7x. This valuation tells us it’s a bit of a market darling with a lot of good news priced in - we think other companies feature superior fundamentals at the moment.

Wall Street analysts have a consensus one-year price target of $94 on the company (compared to the current share price of $82.57).