Directed Energy Contract Uncertainty Will Shape A Cautious Yet Stable Outlook

Catalysts

About nLIGHT

nLIGHT supplies high power semiconductor and fiber laser technologies for aerospace, defense and commercial manufacturing applications.

What are the underlying business or industry changes driving this perspective?

• Although U.S. and allied defense agencies are leaning into high energy laser solutions for counter UAS and missile defense under programs such as HELSI 2 and Golden Dome, the eventual wind down of the $171 million HELSI 2 contract after 2026 could limit follow through in directed energy product growth and pressure product revenue once current visibility rolls off.
• While nLIGHT is vertically integrated in the U.S. and aligned with policy priorities that favor domestic sourcing for non kinetic defense systems, heavy dependence on a relatively concentrated set of directed energy programs may leave total revenue and earnings exposed if procurement schedules or funding profiles shift.
• Even though amplifier shipments today support high product margins that reached 41% in Q3 2025, the push to increase amplifier volumes and make extremely complex devices more manufacturable could face technical bottlenecks that slow efficiency gains and cap future product gross margin improvement.
• Despite a growing base of long running laser sensing programs, including a new US$50 million missile guidance contract and classified projects, any delay in transitioning these efforts to larger scale production could restrain growth in sensing revenue and limit the contribution to overall earnings.
• While commercial microfabrication and industrial demand has recently been stable, management still expects commercial revenue to decline in 2026, which may offset some defense strength and restrict improvement in consolidated gross margin and net income.

Assumptions

This narrative explores a more pessimistic perspective on nLIGHT compared to the consensus, based on a Fair Value that aligns with the bearish cohort of analysts. How have these above catalysts been quantified?

• The bearish analysts are assuming nLIGHT's revenue will grow by 15.7% annually over the next 3 years.
• The bearish analysts are not forecasting that nLIGHT will become profitable in next 3 years. To represent the Analyst Price Target as a Future PE Valuation we will estimate nLIGHT's profit margin will increase from -19.1% to the average US Electronic industry of 8.2% in 3 years.
• If nLIGHT's profit margin were to converge on the industry average, you could expect earnings to reach $28.9 million (and earnings per share of $0.51) by about January 2029, up from $-43.5 million today.
• In order for the above numbers to justify the price target of the more bearish analyst cohort, the company would need to trade at a PE ratio of 99.7x on those 2029 earnings, up from -51.3x today. This future PE is greater than the current PE for the US Electronic industry at 27.8x.
• The bearish analysts expect the number of shares outstanding to grow by 3.58% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 8.44%, as per the Simply Wall St company report.

Risks

What could happen that would invalidate this narrative?

• Continued growth in aerospace and defense revenue, supported by programs such as HELSI 2, Golden Dome related work, international directed energy contracts and long running missile guidance programs, could keep total revenue trending higher rather than flat, with a direct effect on earnings and free cash flow.
• If amplifier volumes keep scaling across multiple domestic and international defense programs and manufacturing efficiency improves on these complex devices, product gross margin, which was 41% in Q3 2025, could stay elevated or improve, lifting overall gross margin and net income above a stable share price scenario.
• The company has already shifted from a non GAAP net loss in the prior year period to non GAAP net income of US$4.3 million in Q3 2025 and generated positive free cash flow, so any continued improvement in operating leverage and profitability could support a higher valuation rather than a flat share price, through stronger earnings.
• The HELSI 2 contract is expected to run through 2026 and management indicates that other directed energy and sensing programs are already booked to offset the eventual wind down, so a sustained backlog and pipeline in these long term defense areas may reduce revenue volatility, supporting more resilient revenue and potentially higher earnings than implied by a flat share price view.
• Ongoing progress in classified sensing programs, the new US$50 million long running missile guidance contract and potential additional contracts tied to non kinetic missile defense initiatives could expand the sensing business beyond current levels, which would add to revenue diversity and could improve margins and earnings over time.

Valuation

How have all the factors above been brought together to estimate a fair value?

• The assumed bearish price target for nLIGHT is $40.0, which represents up to two standard deviations below the consensus price target of $47.43. This valuation is based on what can be assumed as the expectations of nLIGHT's future earnings growth, profit margins and other risk factors from analysts on the more bearish end of the spectrum.
  
• However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of $60.0, and the most bearish reporting a price target of just $40.0.
  
• In order for you to agree with the more bearish analyst cohort, you'd need to believe that by 2029, revenues will be $352.4 million, earnings will come to $28.9 million, and it would be trading on a PE ratio of 99.7x, assuming you use a discount rate of 8.4%.
  
• Given the current share price of $43.94, the analyst price target of $40.0 is 9.8% lower. The relatively low difference between the current share price and the analyst consensus price target indicates that they believe on average, the company is fairly priced.
  
• We always encourage you to reach your own conclusions though. So sense check these analyst numbers against your own assumptions and expectations based on your understanding of the business and what you believe is probable.