HELSI-2 Program And Laser Sensing Will Create Future Opportunities

Key Takeaways

• Growth in aerospace and defense markets, along with significant backlog increase, suggests strong future revenue streams and order fulfillment potential.
  
• U.S. defense investments and emerging manufacturing interests offer long-term diversification and growth opportunities for nLIGHT.
  
• Increased competition, declining margins, and restructuring expenses in China signify financial strain and could hinder profitability improvements.

Catalysts

Designs, develops, manufactures, and sells semiconductor and fiber lasers for industrial, microfabrication, and aerospace and defense applications.

• nLIGHT's strong growth in aerospace and defense, becoming the primary growth driver, with a 20% year-over-year increase to $110 million in 2024, is expected to impact future revenue significantly as these markets continue to expand.
  
• The 50% year-over-year increase in backlog to a record $167 million, with high alignment to Department of Defense priorities such as directed energy and laser sensing, suggests solid future revenue streams and order fulfillment potential.
  
• The multiyear Department of Defense-funded HELSI-2 program and accelerated component shipments for a 1-megawatt high-energy laser are projected catalysts for revenue growth and potentially improved earnings as nLIGHT fulfills these contracts.
  
• Emerging interest in metal additive manufacturing, particularly for defense markets like hypersonics, could offer long-term growth opportunities, potentially leading to increased revenue and diversification of product lines.
  
• The recent U.S. executive order for a missile defense shield, emphasizing non-kinetic missile defense capabilities, positions nLIGHT to benefit from significant U.S. investment, possibly enhancing both revenue and net margins through high-value defense contracts.

nLIGHT Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming nLIGHT's revenue will grow by 7.4% annually over the next 3 years.
• 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 -30.6% to the average US Electronic industry of 8.3% in 3 years.
• If nLIGHT's profit margin were to converge on the industry average, you could expect earnings to reach $20.5 million (and earnings per share of $0.39) by about April 2028, up from $-60.8 million today. The analysts are largely in agreement about this estimate.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 46.9x on those 2028 earnings, up from -5.7x today. This future PE is greater than the current PE for the US Electronic industry at 19.3x.
• Analysts expect the number of shares outstanding to grow by 3.08% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 7.35%, as per the Simply Wall St company report.

nLIGHT Future Earnings Per Share Growth

Risks

• The company experienced a decrease in total revenue in 2024, with a drop of 5% compared to 2023, and a significant decline in gross margins, which could negatively impact its earnings.
  
• The commercial markets have faced a challenging year, with revenue down 25% year-over-year, primarily due to increased competition from China and weak global manufacturing demand, which could continue to pressure future revenues.
  
• The company's product gross margin was severely impacted, dropping from 22% to 1% in the fourth quarter, influenced by lower sales and nonroutine inventory charges, which could affect net margins adversely if not addressed.
  
• There are execution challenges related to the highly technical nature of defense work and the timing of government program deliveries, which could lead to unpredictable revenues and earnings.
  
• Restructuring charges related to the shutdown of manufacturing operations in China and increased operating expenses indicate financial strain, impacting net earnings and possibly delaying improvements in profitability.

Valuation

• The analysts have a consensus price target of $14.667 for nLIGHT based on their expectations of its future earnings growth, profit margins and other risk factors. However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of $20.0, and the most bearish reporting a price target of just $11.0.
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2028, revenues will be $246.3 million, earnings will come to $20.5 million, and it would be trading on a PE ratio of 46.9x, assuming you use a discount rate of 7.3%.
• Given the current share price of $7.12, the analyst price target of $14.67 is 51.5% higher.
• 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.