Nova (NVMI)

Semiconductor quality control company Nova (NASDAQ:NVMI) reported Q1 CY2025 results topping the market’s revenue expectations, with sales up 50.5% year on year to $213.4 million. Guidance for next quarter’s revenue was better than expected at $215 million at the midpoint, 1.6% above analysts’ estimates. Its non-GAAP profit of $2.18 per share was 4.4% above analysts’ consensus estimates.

Company Overview

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

Competitors offering semiconductor process control systems include KLA Corporation (NASDAQ:KLAC), ASML Holdings (NASDAQ:ASML), Lam Research (NASDAQ:LRCX), and Thermo Fisher Scientific (NYSE:TMO).

A company’s long-term performance is an indicator of its overall quality. Any business can put up a good quarter or two, but many enduring ones grow for years. Thankfully, Nova’s 26.5% annualized revenue growth over the last five years was incredible. Its growth surpassed the average semiconductor company and shows its offerings resonate with customers, a great starting point for our analysis. 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).

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. Nova’s annualized revenue growth of 14.3% over the last two years is below its five-year trend, but we still think the results suggest healthy demand.

This quarter, Nova reported magnificent year-on-year revenue growth of 50.5%, and its $213.4 million of revenue beat Wall Street’s estimates by 1.5%. Beyond the beat, this marks 5 straight quarters of growth, implying that Nova is in the middle of its cycle - a typical upcycle generally lasts 8-10 quarters. Company management is currently guiding for a 37.1% year-on-year increase in sales next quarter.

Looking further ahead, sell-side analysts expect revenue to grow 11.6% over the next 12 months, a slight deceleration versus the last two years. Still, this projection is commendable and implies the market is baking in success for its products and services.

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, Nova’s DIO came in at 175, which is 9 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.

Nova’s gross margin is well ahead of its semiconductor peers, and its strong pricing power is an output of its differentiated, value-add products. As you can see below, it averaged an excellent 57% gross margin over the last two years. That means Nova only paid its suppliers $42.96 for every $100 in revenue.

In Q1, Nova produced a 57.3% gross profit margin, down 1.4 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.

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.

Nova has been a well-oiled machine over the last two years. It demonstrated elite profitability for a semiconductor business, boasting an average operating margin of 27.3%. This result isn’t surprising as its high gross margin gives it a favorable starting point.

Looking at the trend in its profitability, Nova’s operating margin rose by 7.4 percentage points over the last five years, as its sales growth gave it operating leverage.

This quarter, Nova generated an operating profit margin of 29.6%, up 3.4 percentage points year on year. The increase was encouraging, and because its gross margin actually decreased, we can assume it was more efficient because its operating expenses like marketing, R&D, and administrative overhead grew slower than its revenue.

We track the long-term change in earnings per share (EPS) for the same reason as long-term revenue growth. Compared to revenue, however, EPS highlights whether a company’s growth is profitable.

Nova’s EPS grew at a spectacular 34.5% compounded annual growth rate over the last five years, higher than its 26.5% annualized revenue growth. This tells us the company became more profitable on a per-share basis as it expanded.

We can take a deeper look into Nova’s earnings quality to better understand the drivers of its performance. As we mentioned earlier, Nova’s operating margin expanded by 7.4 percentage points over the last five years. This was the most relevant factor (aside from the revenue impact) behind its higher earnings; taxes and interest expenses can also affect EPS but don’t tell us as much about a company’s fundamentals.

In Q1, Nova reported EPS at $2.18, up from $1.39 in the same quarter last year. This print beat analysts’ estimates by 4.4%. Over the next 12 months, Wall Street expects Nova’s full-year EPS of $7.47 to grow 9.9%.

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.

Nova has shown terrific cash profitability, and if sustainable, puts it in an advantageous position to invest in new products, return capital to investors, and consolidate the market during industry downturns. The company’s free cash flow margin was among the best in the semiconductor sector, averaging 28.6% over the last two years.

Taking a step back, we can see that Nova’s margin expanded by 4 percentage points over the last five years. This is encouraging because it gives the company more optionality.

Nova’s free cash flow clocked in at $59.69 million in Q1, equivalent to a 28% margin. The company’s cash profitability regressed as it was 12 percentage points lower than in the same quarter last year, but we wouldn’t read too much into it because capital expenditures can be seasonal and companies often stockpile inventory in anticipation of higher demand, leading to quarter-to-quarter swings. Long-term trends are more important.

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).

Nova’s five-year average ROIC was 31.2%, placing it among the best semiconductor companies. This illustrates its management team’s ability to invest in highly profitable ventures and produce tangible results for shareholders.

Companies with more cash than debt have lower bankruptcy risk.

Nova is a profitable, well-capitalized company with $541.8 million of cash and $235.7 million of debt on its balance sheet. This $306.1 million net cash position is 5.7% 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 enjoyed seeing Nova beat analysts’ adjusted operating income expectations this quarter. We were also glad its EPS outperformed Wall Street’s estimates. On the other hand, its inventory levels increased. Overall, we think this was a decent quarter with some key metrics above expectations. Investors were likely hoping for more, and shares traded down 2.2% to $197.17 immediately after reporting.

Updated: May 19, 2025 at 10:20 PM EDT

We think that the latest earnings result is only one piece of the bigger puzzle. If you’re deciding whether to own Nova, you should also grasp the company’s longer-term business quality and valuation.

There are numerous reasons why we think Nova is one of the best semiconductor companies out there. First of all, the company’s revenue growth was exceptional over the last five years. On top of that, its stellar ROIC suggests it has been a well-run company historically, and its powerful free cash flow generation enables it to stay ahead of the competition through consistent reinvestment of profits.

Nova’s P/E ratio based on the next 12 months is 23.1x. Looking at the semiconductor space today, Nova’s qualities as one of the best businesses really stand out, and we like it at this price.

Wall Street analysts have a consensus one-year price target of $251.52 on the company (compared to the current share price of $188.25), implying they see 33.6% upside in buying Nova in the short term.

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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