Everspin Stock: A Differentiated Semiconductor Memory Play

Computer RAM

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Everspin (NASDAQ:NASDAQ:MRAM) has developed products based on an innovative memory technology which is termed MRAM or Magnetoresistive Random Access Memory which I will elaborate on later.

After having seen the rapid adoption of its disruptive memory chips which include toggle MRAM and STT-MRAM in applications like 5G, industrial automation, and AI, sales have progressed rapidly, but as shown in the chart below, appear to have peaked in the final quarter of 2021 which ended in December last year.

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MRAM Revenue (Quarterly) data by YCharts

It is important to investigate the reasons for this by diving into the quarterly revenues, namely for the last reported quarter (Q2-2022), but, first, I provide the reasons why a small semiconductor play valued at only $148 million is able to sell products in a market dominated by behemoths like Micron (NASDAQ:MU), Samsung (OTCPK:SSNLF), Toshiba (OTCPK:TOSYY) and others.

The MRAM differentiator

These three giant memory chip manufacturers produce advanced DRAMs (dynamic random access memory) which are used in computers together with processors from Intel (NASDAQ:INTC) or Advanced Micro Devices (NASDAQ:AMD) to process data. Now, one main difference between MRAM and DRAM is that the latter is volatile, so when the computer is powered off, all the data gets flushed out. Hence, to prevent data loss, DRAMs have to be bundled with backup power supply modules to make them non-volatile or persistent.

It is precisely here that Everspin’s STT-MRAM (Spin-transfer Torque MRAM) becomes useful for product manufacturers in the industrial, medical, automotive, aerospace, and data center sectors. Its advantage is its availability as a single module instead of manufacturers having to purchase DRAM and power supply units separately before combining them together in the circuit board.

This is the reason for which its quarterly revenues have grown rapidly, even faster than giant competitor Micron when compared on a 5-year basis as shown in the blue chart below. These charts also show that both companies witnessed steep rises in sales from 2021 when demand was strong. This has changed in 2022 with growth slowing down, most probably because of large inventories built up by customers. The revenue drop in the first quarter of 2022 was more drastic for Everspin since its earlier growth was steeper.

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MRAM Revenue (Quarterly) data by YCharts

Furthermore, Everspin also faces competition from smaller MRAM developers like Avalanche and Spin Transfer Technologies, with Samsung also venturing into magnetoresistive-based memory. Higher competition could also explain why for STT-RAM, revenues were “slightly down from before”.

However, boasting a pioneering role in the successful commercialization of MRAM, Everspin has more than ten years of manufacturing experience which is proving crucial to navigate through the competition.

Competition, Profitability, and Cash

At the same time, it has broadened its product pipeline with new innovations like the xSPI low-density STT-MRAM products which are currently being qualified by customers. Additionally, its FPGA, which is a field-programmable chip constitutes a valid alternative to conventional NOR Flash technology. Therefore, growth has not yet peaked as the ingredients to drive further revenues are present.

Continuing on a positive note, Toggle MRAM, the company’s other MRAM “is doing great”, according to the executives. Here, the company faces competition from manufacturers of non-volatile SRAM and ferroelectric RAM suppliers like Cypress, and Fujitsu (OTCPK:FJTSY) as well as the big three semiconductor memory plays I mentioned in the introduction. In this area, there is a backlog (unfulfilled demand) which should last into 2022 with the company working with foundry partners to boost capacity.

Therefore, strength in Toggle-SRAM should offset weakness in STT-MRAM.

Shifting to profitability, often companies that are able to grow rapidly amid a supply chain crunch do so at the expense of margins after bearing higher costs from items like expedited shipping and other additional inflation-related expenses. This was the case with Everspin too, but, it was able to offset part of the incremental cost attributed to supply chain constraints and high inflation through cost reductions and improved production efficiency.

In this way, despite seeing a year-on-year decrease, margins of 58.5% still increased on a sequential basis when compared to Q1. This trend should increase as, according to the management, they are “alleviating some of the supply chain constraints” and gross margins to be sustained around the mid-50s.

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Quarterly revenues (www.seekingalpha.com)

As for operating income, it fell to 11.6% due to higher expenses related primarily to supporting a new STT-MRAM industrial product. Looking forward to Q3, operating income should continue to be under pressure due to higher raw materials and R&D costs.

On the other hand, cash flow from operations rose to $4.3 million in Q2 compared to -$1 million in Q1 and -$0.6 million for Q2 of last year. Hence, the total available cash has been increased by $3.2 million to $23.1 million. This is higher than the $7.5 million of debt, which means that Everspin’s business model is financially sustainable, especially in light of a tightening in monetary conditions. My optimism also stems from the fact that both its trailing gross, operating, and free cash flow margins are above the sector median’s average as shown in the table below.

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Profitability Grade (www.seekingalpha.com)

Valuations and Key takeaways

Still, as I touched upon in the previous section, margins may come under some pressure in Q3 due to higher input costs as the company has not meaningfully increased its inventory levels to mitigate supply fluctuations. This may be the reason why the expectation is for the net income per share in Q3 to be lower than for the first two quarters of this year.

Moreover, the stock could be volatile if one of the larger industry plays were to acquire a smaller one, thereby posing a more direct threat to Everspin’s competitive positioning. Also, the fact that its chips are used as components and embedded in the circuit boards of clients implies less visibility as to demand from end customers. This is likely the reason that some companies in the sector do not provide quarterly guidance, but the fact that Everspin did so for its third quarter shows management confidence.

For this purpose, it expects revenues whose midpoint of $14.9 million represents a $0.1 million rise over last year’s Q3. This guidance seems to have accounted for supply chain constraints which may limit the availability of certain raw materials required by Everspin which may result in the company not being able to meet customer demand.

As for valuations, they are favorable especially the trailing Price to Cash flow multiple of 11.93x which is below the IT sector median by 40%. Adjusting accordingly, I obtain a target of $9.30 ($6.70 x 1.4) based on the current share price of $6.70.

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Valuations Grades (www.seekingalpha.com)

Now, this is a high target and its achievement will also depend on how supply chain and inflation-related costs are managed. In this respect, the latest CPI figures indicate that inflation stays high. As a result, the Federal Reserve will have to hike interest rates aggressively and this is the reason risk assets including stocks were down since yesterday. Therefore, the market should remain volatile this week and it is better to wait for the dust to settle before investing. This is the reason I have a neutral stance.

Finally, with its high profitability, and better cash generation ability, Everspin is a worthwhile investment for those looking to invest in a differentiated semiconductor memory play.

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