IPG Photonics (IPGP)

Fiber laser manufacturer IPG Photonics (NASDAQ:IPGP) beat Wall Street’s revenue expectations in Q1 CY2025, but sales fell by 9.6% year on year to $227.8 million. On the other hand, next quarter’s revenue guidance of $225 million was less impressive, coming in 6.2% below analysts’ estimates. Its non-GAAP profit of $0.31 per share was 40.9% 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.

Examining a company’s long-term performance can provide clues about its quality. Any business can have short-term success, but a top-tier one grows for years. Over the last five years, IPG Photonics’s demand was weak and its revenue declined by 5.3% per year. This was below our standards and is a sign of poor business quality. Semiconductors are a cyclical industry, and long-term investors should be prepared for periods of high growth followed by periods of revenue contractions.

Long-term growth is the most important, but short-term results matter for semiconductors because the rapid pace of technological innovation (Moore's Law) could make yesterday's hit product obsolete today. IPG Photonics’s recent performance shows its demand remained suppressed as its revenue has declined by 17.7% annually over the last two years.

This quarter, IPG Photonics’s revenue fell by 9.6% year on year to $227.8 million but beat Wall Street’s estimates by 1.2%. Despite the beat, the drop in sales could mean that the current downcycle is deepening. Company management is currently guiding for a 12.7% year-on-year decline in sales next quarter.

Looking further ahead, sell-side analysts expect revenue to grow 2.9% over the next 12 months. Although this projection indicates its newer products and services will fuel better top-line performance, it is still below average for the sector.

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 190, which is 22 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 well below other semiconductor companies, indicating a lack of pricing power and a competitive market. As you can see below, it averaged a 38.4% gross margin over the last two years. Said differently, IPG Photonics had to pay a chunky $61.65 to its suppliers for every $100 in revenue.

IPG Photonics produced a 39.4% gross profit margin in Q1, in line with the same quarter last year. Zooming out, IPG Photonics’s full-year margin has been trending down over the past 12 months, decreasing by 6.6 percentage points. If this move continues, it could suggest deteriorating pricing power and higher input costs (such as raw materials and manufacturing expenses).

Operating margin is a key measure of profitability. Think of it as net income - the bottom line - excluding the impact of taxes and interest on debt, which are less connected to business fundamentals.

Although IPG Photonics broke even 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 2.3% 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 42.4 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 Q1, IPG Photonics’s breakeven margin was down 6.8 percentage points year on year. Since IPG Photonics’s operating margin decreased more than its gross margin, we can assume it was less efficient because expenses such as marketing, R&D, and administrative overhead increased.

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 25.3% 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 declined by 42.4 percentage points over the last five years. This was the most relevant factor (aside from the revenue impact) behind its lower earnings; taxes and interest expenses can also affect EPS but don’t tell us as much about a company’s fundamentals.

In Q1, IPG Photonics reported EPS at $0.31, down from $0.72 in the same quarter last year. Despite falling year on year, this print easily cleared analysts’ estimates. Over the next 12 months, Wall Street is optimistic. Analysts forecast IPG Photonics’s full-year EPS of negative $3.80 will flip to positive $1.61.

If you’ve followed StockStory for a while, you know we emphasize free cash flow. Why, you ask? We believe that in the end, cash is king, and you can’t use accounting profits to pay the bills.

IPG Photonics has shown mediocre cash profitability over the last two years, giving the company limited opportunities to return capital to shareholders. Its free cash flow margin averaged 14.9%, subpar for a semiconductor business.

Taking a step back, we can see that IPG Photonics’s margin dropped by 5.2 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 burned through $11.37 million of cash in Q1, equivalent to a negative 5% margin. The company’s cash flow turned negative after being positive 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? Enter ROIC, a metric showing how much operating profit a company generates relative 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 5.8%, somewhat low compared to the best semiconductor companies that consistently pump out 35%+.

Businesses that maintain a cash surplus face reduced bankruptcy risk.

IPG Photonics is a well-capitalized company with $926.9 million of cash and no debt. This position is 34.4% 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.

We liked that IPG Photonics beat analysts’ adjusted operating income and EPS expectations this quarter. On the other hand, its revenue and EPS guidance for next quarter missed and its inventory levels increased. Overall, this print was on the weaker side, and the stock traded down 6.5% to $59 immediately following the results.

Updated: July 10, 2025 at 10:31 PM EDT

Before deciding whether to buy IPG Photonics or pass, we urge investors to consider business quality, valuation, and the latest quarterly results.

IPG Photonics doesn’t pass our quality test. To kick things off, 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 declining operating margin shows the business has become less efficient.

IPG Photonics’s P/E ratio based on the next 12 months is 46.6x. This multiple tells us a lot of good news is priced in - we think other companies feature superior fundamentals at the moment.

Wall Street analysts have a consensus one-year price target of $66.40 on the company (compared to the current share price of $75.04), implying they don’t see much short-term potential in IPG Photonics.