Nova Stock: Good Performance, But Wait Until Dust Settles (NASDAQ:NVMI)

Nova (NASDAQ:NVMI) is in great shape for the most part. NVMI continues to set record after record in terms of the top and the bottom line. However, the same cannot be said of the stock’s performance. NVMI may be on a record-setting pace, but it has not been enough to stem the stock’s decline. Why will be covered next.

Long NVMI has not been a winning bet this year

NVMI has been testing people’s patience. After a very strong year in 2021 when the stock appreciated by 108%, the stock is down 38% YTD in 2022. In comparison, the iShares Semiconductor ETF (SOXX) has lost 35% YTD. NVMI has not done well, but other semis have not done much better either. The sector has struggled along with the stock market as a whole.

The chart above shows how the stock has gone down. On the one hand, the rate of decline has slowed down from where it used to be earlier in the year. On the other hand, the stock is still in a descending channel if the recent lows and highs are connected. Both the lows and the highs are trending lower, a bad sign for anyone who is bullish NVMI.

At the same time, the stock did not break below the lower trendline, but stopped just short of it. The stock could break through on another attempt, but a bounce in the stock would not be so unusual at this point, especially after the big decline in recent days. Still, the trend is pointing down. It’s possible for the stock to make moves that run counter to the existing trend, but that does not mean the trend is no longer in force.

The stock has also broken through what used to be support in the $100 region. Note how the stock’s decline slowed down once it got to $100, which was not unexpected based on past history. The stock’s decline halted for a while, but it appears support has buckled. The path looks clear for the stock to move lower. The stock may now be heading to the $80 region and possibly even lower than that.

NVMI is still doing great from an operational standpoint

The poor performance of the stock is especially frustrating since the company itself is doing very well. Both the top and the bottom line continue to grow rapidly. NVMI is actually on a record-setting streak with new records being set in seemingly every quarter. This was true once again in the most recent quarterly report.

NVMI surpassed consensus estimates and the top end of its own guidance on its way towards another record-setting quarter in Q1 FY2022. Q1 revenue increased by 59% YoY to $134M, a new quarterly high and the eight consecutive quarter of growth. GAAP EPS increased by 78.3% YoY to $1.07 and non-GAAP EPS increased by 85.7% YoY to $1.30.

It’s worth mentioning that the quarterly numbers got a boost since Q1 FY2022 was the first quarter with the addition of the recently acquired ancosys GmbH, a transaction valued at $90M. In addition, the Q1 tax rate of 11% was 400 basis points lower than the expected 15% due to tax incentives, which can fluctuate from quarter to quarter.

Still, organic growth was impressive regardless. Quarterly revenue, operating margins and EPS all reached new record highs. The backlog continues to grow with new bookings reaching record highs, which pretty much ensures the quarterly numbers in the rest of FY2022 won’t see much of a drop. The table below shows the numbers from Q1 FY2022.

(GAAP)	Q1 FY2022	Q4 FY2021	Q1 FY2021	QoQ	YoY
Revenue	$133.957M	$121.521M	$84.133M	10.23%	59.22%
Gross margin	57%	56%	57%	100bps	–
Operating margin	28%	25%	23%	300bps	500bps
Operating income	$37.106M	$29.893M	$19.758M	24.13%	87.80%
Net income	$34.162M	$22.226M	$17.616M	53.70%	93.93%
EPS	$1.07	$0.73	$0.60	46.58%	78.33%
(Non-GAAP)
Revenue	$133.957M	$121.521M	$84.133M	10.23%	59.22%
Gross margin	59%	57%	57%	200bps	200bps
Operating margin	35%	29%	27%	600bps	800bps
Operating income	$46.540M	$35.123M	$22.555M	32.51%	106.34%
Net income	$41.487M	$32.752M	$20.485M	26.67%	102.52%
EPS	$1.30	$1.08	$0.70	20.37%	85.71%

Source: NVMI

Guidance calls for Q2 FY2022 revenue of $133-141M, an increase of 40.2% YoY at the midpoint. The forecast expects GAAP EPS of $0.82-0.96, an increase of 15.6% YoY at the midpoint, and non-GAAP EPS of $1.09-1.23, an increase of 28.9% YoY at the midpoint. Note that NVMI does not expect to receive the tax benefits mentioned earlier in Q2. The tax rate is expected to revert back to 15% in Q2.

	Q2 FY2022 (guidance)	Q2 FY2021	YoY
Revenue	$133-141M	$97.7M	36.13-56.96%
GAAP EPS	$0.82-0.96	$0.77	6.49-24.68%
Non-GAAP EPS	$1.09-1.23	$0.90	21.11-36.67%

NVMI had previously set a goal of $500M in annual revenue in the NOVA500 plan. The Q1 numbers and the expected ones for Q2 put NVMI on track to hit this target by the end of FY2022, way ahead of schedule.

NVMI faces some headwinds

The record-setting performance was achieved even with NVMI being held back by a couple of issues. First, NVMI is dealing with supply chain issues like pretty much everyone in the industry. For instance, lockdowns in China continue to impact quarterly performance, something that is factored into guidance. From the Q1 earnings call:

“So we see those disruptions happening, okay? So as you said, it’s the ongoing work in the ports, as well as transportation between cities, as well as even the simple logistics of signing papers, where people are locked down, okay? So we do see those restrictions having effect on us as well as part of the hard things that are going in China in regard to the logistics. So, but currently looking on the second quarter, those are factored in already.

And we need to see, what will happen in the second half, if it will be easier, or it will be harder. But definitely, when we’re looking right now on the guidance for the second quarter, we are taking into consideration that the lockdown will continue at least in the largest city of Beijing and Shanghai.”

A transcript of the Q1 FY2022 earnings call can be found here.

Trade restrictions could be another trouble spot. There are reports the U.S. Department of Commerce is considering adding new restrictions to the sale of semiconductor manufacturing equipment to China, which could have an impact on NVMI since some of its products are manufactured in the U.S.

“So according to our product portfolio, the three product lines. So we have the dimensional and the OCD that are manufactured in Israel. We have the chemical now that is manufactured in Germany. Those ones are not related or are not affected by the restriction currently.

Now regarding the US based manufacturing, we’re talking about the XPS and the Metreon, and they are exposed only on the – currently on the SMIC. And even to SMIC, while it’s SMIC, while its advanced logic customers do get licensed to export to non-advanced nodes. So all-in-all, if you’re looking right now on my exposure to SMIC on the advanced nodes for XPS, which is it’s not large. Okay. We’re talking about several percentage.”

Keep in mind that China accounts for roughly 25% of sales at NVMI, which means NVMI could be negatively impacted, depending on the severity of the restrictions. At the moment, new restrictions have not been put into action. NVMI itself does not believe trade restrictions will have much of an impact.

Why the stock could continue to struggle despite it all

NVMI is in good shape, but there are clearly other issues at work that are weighing on the stock. NVMI would do better if quarterly numbers were all that matters, but the reality is that they have been overshadowed by worries about macro issues. Rising inflation is a prominent issue, especially as to what it could mean for stocks in terms of what the Federal Reserve will do in response.

There are other concerns that are closer to home. There are increasingly signs demand for certain consumer goods is going down. More and more companies are reporting falling demand for consumer goods like smartphones, which is the leading user of semiconductor chips. For instance, Samsung has recently decided to cut back on orders.

Worse of all, conditions are not expected to get better anytime soon. We are more likely to be in the early stages of a downturn than the latter stages. Stocks that are still reporting good numbers could very well see them deteriorate in the coming quarters.

Stocks are getting dumped, especially those that trade at elevated valuations. NVMI could be vulnerable in that regard, especially since it comes at higher valuations than most and is therefore unlikely to attract those who are looking for a bargain during these times.

NVMI trades at a premium to most, which is difficult in today’s environment where there are more sellers than buyers. For instance, the stock is still valued at 5.45 times book value even with the big decline this year. In contrast, the sector median is about 3. The table below shows the multiples NVMI trades at.

	NVMI
Market cap	$2.68B
Enterprise value	$2.45B
Revenue (“ttm”)	$465.9M
EBITDA	$143.8M
Trailing P/E	26.26
Forward P/E	24.52
PEG ratio	0.28
P/S	5.77
P/B	5.45
EV/sales	5.27
Trailing EV/EBITDA	17.07
Forward EV/EBITDA	13.16

Source: Seeking Alpha

Investor takeaways

While quarterly earnings are important, they are not the only things that matter. NVMI is doing a fine job doing what it is supposed to do as a company, which is to grow earnings. However, it does not help anyone who is long when all that growth does not translate into stock gains. Longs want to see their stock appreciate in value and NVMI is failing on that front.

I remain bullish on NVMI’s prospects in the long run as mentioned before in a previous article, but to be a buyer of NVMI does not look like a prudent move at this time. The case for long NVMI has some arguments in favor of it, including strong earnings growth, but they’re trumped by arguments against it.

While there have been countertrend moves and there may be another one soon, the trend all year is for the stock to move lower. The chart patterns suggest the stock wants to move lower after being held back by support. Multiples are such that there is room for a move lower, especially in today’s market where paying a higher multiple is harder to justify.

The macro environment continues to deteriorate and there are no signs the end is near. The fact that the stock is declining in the face of strong earnings growth is telling. Moreover, the same conditions that have given the stock problems all year are not going away anytime soon. Bottom line, while there may come a time to go long once again, now is not that time. Better to move to the sidelines and wait until the dust settles.