The AI spending mania continues. And there is no doubt that there will be winners and losers, especially when it comes to return on that investment.
But when it comes to contemplating if this AI thing will really be a transformational technology, a key sobering issue, or bottleneck seems to always temper the enthusiasm: power.
Some experts have even opined that in order for AI to fully scale, some dramatic improvement in thermal dynamics itself will be necessary.
NVE Corporation (NVEC) may have a solution.
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Its products include magnetic sensors, couplers (isolators), power products, and magnetoresistive random-access memory (MRAM) technologies. But importantly, these products utilize “spintronic” technology, meaning electron spin is harnessed rather than electron charge to acquire, store, and transmit information.
The result is comparatively less heat dissipation and energy use. This marginal improvement applied across a data center with a multitude of servers could be material.
At this point it appears the data center end market is a minimal portion of company sales, so the bet is that this opportunity materializes more significantly down the road. And the company believes its new distribution relationship with Semitech may help in this vein.
Zacks had previously been on the sidelines with a Neutral rating for NVE Corp.(NVEC) but recently upgraded to Outperform. The previous hesitancy was primarily related to softness in the defense space and valuation.
The company reports that the defense sales now appear to be rebounding. But what about the valuation, presently at a double-digit sales multiple and 20+ EBITDA multiple?
Well, for a potential AI play, that valuation actually isn’t that bad. But we talked ourselves into the valuation for a number of other concrete reasons, in our opinion.
Firstly, this technology does not utilize any rare earth metals. We believe this could become a huge strategic advantage given the supply issues with rare earth metals and the international politics involved.
Secondly, the revenue base is still relatively small at $7.65 m this past quarter, suggesting the potential for step-up, parabolic growth which could enable growing into that sales multiple fairly quickly.
Thirdly, this isn’t an all or nothing data center play, more of an optionality play. The company sells into other strong end uses like medical devices, robotics, and industrial automation which all require precise sensing technology.
Fourthly, I think it’s fair to say that the AI infrastructure plays, or “picks n shovels”, have outperformed AI software, offering some de-risking solace.
Fifthly, the company has a gross margin of 78% and an operating margin of 62%, thus it is not hemorrhaging cash and looking to raise capital. These gaudy numbers themselves may justify the valuation.
And lastly, the company has recently finished a major capacity expansion phase so it must have high confidence about its technology’s future to commit these cap ex dollars. This also signals the beginning of a potential new commercialization phase.
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This article originally published on Zacks Investment Research (zacks.com).
The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.
