Shares of chip design start-up Navitas Semiconductor (NVTS 14.33%) have rallied over 30% following its first-quarter 2023 earnings update. This story is starting to sound familiar. A small company betting big on electric vehicles (EVs) and power grid electrification puts up stellar sales growth, and the market hands it a win.
Not for entirely bad reasons, though. EVs are quickly displacing traditional internal combustion engines in the new-car sales department, the power grid needs more efficient infrastructure, and mobile (think 5G phones and wireless network equipment) is power-hungry and needs new chip technology too.
But before you chase this hot chip stock of the moment, consider a few important items first.
Fast growth, but at a steep cost
For a bit of background, Navitas is a start-up power chip developer that went public via SPAC in late 2021. As you might imagine, shares struggled in 2022 thanks to the bear market resetting stock prices, especially on high-flying upstarts like this one.
Navitas has positioned itself as a GaN (gallium nitride) and SiC (silicon carbide) power chip designer. GaN and SiC are novel materials -- known as wide band-gap (WBG) semiconductors -- being used in lieu of silicon as a substrate in certain applications. In layperson's terms, a WBG semiconductor can handle higher voltages and operate with more efficiency. Thus GaN and SiC are getting put to increasing use in EVs, fast-charging, and high-end mobile devices.
But breaking into the semiconductor industry isn't easy, even for a well-funded start-up with cash to burn. And burn through cash Navitas has. What was $268 million in cash and short-term investments at the end of 2021 (after the SPAC merger) has been reduced to $101 million at the end of the first quarter of 2023. Besides operating at a steep loss, Navitas made three acquisitions in 2022: VDD Tech (power conversion chips) last July, GeneSiC (Navitas' entrance into the SiC market) last August, and the purchase of the remaining minority interest Navitas had in a joint venture with Chinese start-up Halo Microelectronics.
These wide-ranging acquisitions are one reason to view Navitas' call for a double in sales in 2023 (from $38 million in 2022) with a bit of skepticism. The growth isn't organic; it's been acquired. And it's coming at a steep cost. Bear in mind, acquisitions or not, this is still a start-up, and it's exhibiting start-up-like financials. Navitas' operating loss was $35.5 million in Q1 2023, or $12.3 million in losses on an adjusted basis (which backs out $17.2 million in employee stock-based compensation).
In other words, Navitas could be running very low on cash by the end of this year unless it goes out and raises liquidity or starts generating a robust profit -- and fast.
Are GaN and SiC the "cloud" of semiconductors right now?
There are a number of chip company start-ups touting GaN and SiC chip industry "leadership," as well as electric vehicle chip pure-play status -- and getting lots of investor attention as a result. Wolfspeed (WOLF 8.14%) is one, as is auto tech company indie Semiconductor (INDI 9.03%). Let's put Navitas in this basket too.
The current situation with novel chip materials, EV chip start-ups, and such is starting to remind me a bit of the cloud-software craze of years past. Throw "cloud-native" and "cloud-leadership" into a business description, and it was instant investor interest. GaN and SiC are beginning to have a similar feel.
A company claiming that it has GaN or SiC (or both) chip technology is, all on its own, not good enough to make an investment.
Meanwhile, established chip designers and manufacturers are finding success in gradually migrating their operations over to GaN or SiC as they see fit to meet customer demand. Integrated device manufacturer (IDMs, meaning a company that designs and manufactures its own chips) leaders STMicroelectronics (STM 0.45%) and ONsemi (ON 3.56%) are tracking toward $1.2 billion and $1 billion in SiC chip sales in 2023, respectively. Germany's top chipmaker Infineon (IFNNY -0.03%) also recently made a notable GaN chip acquisition.
Oh, and all of these larger companies are generating a profit.
Perhaps Navitas can emerge as a leader in this fast-developing part of the semiconductor market, but it's going to take time for the story to develop -- and for Navitas to prove the merits of its business model versus those of large and established competitors. In the meantime, Navitas Semiconductor stock trades for a whopping 18 times expected 2023 sales. Be leery of making a buy here -- there are much better ways to play the next-gen power semiconductor transition.
