nLIGHT (LASR)

Laser company nLIGHT (NASDAQ:LASR) beat Wall Street’s revenue expectations in Q1 CY2025, with sales up 16% year on year to $51.67 million. On top of that, next quarter’s revenue guidance ($56 million at the midpoint) was surprisingly good and 11.7% above what analysts were expecting. Its non-GAAP loss of $0.04 per share was 78.7% above analysts’ consensus estimates.

Company Overview

Founded by a former CEO and Harvard-educated entrepreneur Scott Keeneyn, nLIGHT (NASDAQ:LASR) offers semiconductor and fiber lasers to the industrial, aerospace & defense, and medical sectors.

Like many equipment and component manufacturers, electronic components companies are buoyed by secular trends such as connectivity and industrial automation. More specific pockets of strong demand include data centers and telecommunications, which can benefit companies whose optical and transceiver offerings fit those markets. But like the broader industrials sector, these companies are also at the whim of economic cycles. Consumer spending, for example, can greatly impact these companies’ volumes.

Competitors offering similar products include IPG Photonics (NASDAQ:IPGP), Coherent (NASDAQ:COHR), and Jenoptik AG (ETR:JEN).

Examining a company’s long-term performance can provide clues about its quality. Any business can put up a good quarter or two, but many enduring ones grow for years. Unfortunately, nLIGHT’s 2.9% annualized revenue growth over the last five years was sluggish. This fell short of our benchmarks and is a tough starting point for our analysis.

We at StockStory place the most emphasis on long-term growth, but within industrials, a half-decade historical view may miss cycles, industry trends, or a company capitalizing on catalysts such as a new contract win or a successful product line. nLIGHT’s performance shows it grew in the past but relinquished its gains over the last two years, as its revenue fell by 5.8% annually. nLIGHT isn’t alone in its struggles as the Electronic Components industry experienced a cyclical downturn, with many similar businesses observing lower sales at this time.

We can better understand the company’s revenue dynamics by analyzing its most important segments, Laser Products and Advanced Developments, which are 69.1% and 30.9% of revenue. Over the last two years, nLIGHT’s Laser Products revenue (lasers, amplifiers, and directed energy products) averaged 10.4% year-on-year declines. On the other hand, its Advanced Developments revenue (R&D contracts) averaged 13.4% growth.

This quarter, nLIGHT reported year-on-year revenue growth of 16%, and its $51.67 million of revenue exceeded Wall Street’s estimates by 9.1%. Company management is currently guiding for a 10.9% year-on-year increase in sales next quarter.

Looking further ahead, sell-side analysts expect revenue to grow 4.3% over the next 12 months. While this projection suggests its newer products and services will fuel better top-line performance, it is still below average for the sector.

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.

nLIGHT has bad unit economics for an industrials company, giving it less room to reinvest and develop new offerings. As you can see below, it averaged a 23.5% gross margin over the last five years. That means nLIGHT paid its suppliers a lot of money ($76.48 for every $100 in revenue) to run its business.

nLIGHT produced a 26.7% gross profit margin in Q1, up 9.9 percentage points year on year. Zooming out, the company’s full-year margin has remained steady over the past 12 months, suggesting its input costs (such as raw materials and manufacturing expenses) have been stable and it isn’t under pressure to lower prices.

nLIGHT’s high expenses have contributed to an average operating margin of negative 19.2% over the last five years. Unprofitable industrials 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, nLIGHT’s operating margin decreased by 21.1 percentage points over the last five years. This raises questions about the company’s expense base because its revenue growth should have given it leverage on its fixed costs, resulting in better economies of scale and profitability. nLIGHT’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, nLIGHT generated a negative 18.6% operating margin. The company's consistent lack of profits raise a flag.

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.

nLIGHT’s earnings losses deepened over the last five years as its EPS dropped 46.6% annually. We tend to steer our readers away from companies with falling EPS, where diminishing earnings could imply changing secular trends and preferences. If the tide turns unexpectedly, nLIGHT’s low margin of safety could leave its stock price susceptible to large downswings.

Like with revenue, we analyze EPS over a shorter period to see if we are missing a change in the business.

For nLIGHT, its two-year annual EPS declines of 1.1% show it’s still underperforming. These results were bad no matter how you slice the data.

In Q1, nLIGHT reported EPS at negative $0.04, up from negative $0.17 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 is optimistic. Analysts forecast nLIGHT’s full-year EPS of negative $0.51 will reach break even.

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.

nLIGHT’s demanding reinvestments have drained its resources over the last five years, putting it in a pinch and limiting its ability to return capital to investors. Its free cash flow margin averaged negative 5.1%, meaning it lit $5.13 of cash on fire for every $100 in revenue.

Taking a step back, we can see that nLIGHT’s margin dropped by 11 percentage points during that time. Almost any movement in the wrong direction is undesirable because it is already burning cash. If the trend continues, it could signal it’s in the middle of a big investment cycle.

nLIGHT burned through $2.30 million of cash in Q1, equivalent to a negative 4.5% 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).

nLIGHT’s five-year average ROIC was negative 29.4%, meaning management lost money while trying to expand the business. Its returns were among the worst in the industrials sector.

We like to invest in businesses with high returns, but the trend in a company’s ROIC is what often surprises the market and moves the stock price. Over the last few years, nLIGHT’s ROIC has unfortunately decreased significantly. Paired with its already low returns, these declines suggest its profitable growth opportunities are few and far between.

Businesses that maintain a cash surplus face reduced bankruptcy risk.

nLIGHT is a well-capitalized company with $116.7 million of cash and $12.62 million of debt on its balance sheet. This $104.1 million net cash position is 24.5% 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 were impressed by how significantly nLIGHT blew past analysts’ EPS expectations this quarter. We were also excited its EBITDA outperformed Wall Street’s estimates by a wide margin. Zooming out, we think this was a solid print. The stock traded up 16.3% to $10 immediately after reporting.

Updated: May 16, 2025 at 10:23 PM EDT

When considering an investment in nLIGHT, investors should account for its valuation and business qualities as well as what’s happened in the latest quarter.

nLIGHT falls short of our quality standards. For starters, its revenue growth was weak over the last five years. And while its projected EPS for the next year implies the company’s fundamentals will improve, the downside is its diminishing returns show management's prior bets haven't worked out. On top of that, its relatively low ROIC suggests management has struggled to find compelling investment opportunities.

nLIGHT’s forward price-to-sales ratio is 2.8x. The market typically values companies like nLIGHT based on their anticipated profits for the next 12 months, but it expects the business to lose money. We also think the upside isn’t great compared to the potential downside here - there are more exciting stocks to buy.

Wall Street analysts have a consensus one-year price target of $14.83 on the company (compared to the current share price of $12.66).

Although the price target is bullish, readers should exercise caution because analysts tend to be overly optimistic. The firms they work for, often big banks, have relationships with companies that extend into fundraising, M&A advisory, and other rewarding business lines. As a result, they typically hesitate to say bad things for fear they will lose out. We at StockStory do not suffer from such conflicts of interest, so we’ll always tell it like it is.

Want to invest in a High Quality big tech company? We’d point you in the direction of Microsoft and Google, which have durable competitive moats and strong fundamentals, factors that are large determinants of long-term market outperformance.

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