Nova Stock Is Still Pointing Up (NASDAQ:NVMI)

Nova Ltd. (NVMI) put the finishing touches on what was a record-setting year in FY2021 with the release of the Q4 report. The numbers suggest NVMI is pretty much clicking on all cylinders, giving longs every reason to stick with NVMI. However, some may still decide it’s not worth sticking with NVMI, despite everything pointing to the contrary. Why will be covered next.

FY2021 was a year for the record books

The latest report from NVMI included a bunch of new records. For instance, Q4 FY2021 revenue increased by 59.3% YoY to $121.5M, the seventh consecutive sequential quarterly increase and a new all-time high, replacing the old record set in Q3 FY2021. Logic and Foundry accounted for 65% of revenue and Memory contributed the remaining 35%. GAAP EPS increased by 55.3% YoY to $0.73 and non-GAAP EPS increased by 96.4% YoY to $1.08.

Note that the bottom line declined sequentially even though the top line increased. There’s a reason for this. Operating expenses were higher than normal in Q4 due in part to end-of-year activities. Q4 FY2021 earnings could have been higher if not for a one-time tax settlement to the tune of $3.7M, all of which contributed to the decline in earnings. The table below shows the numbers for Q4 FY2021.

(GAAP)

Q4 FY2021

Q3 FY2021

Q4 FY2020

QoQ

YoY

Revenue

$121.521M

$112.713M

$76.303M

7.81%

59.26%

Gross margin

56%

58%

55%

(200bps)

100bps

Operating margin

25%

32%

22%

(700bps)

300bps

Operating income

$29.893M

$35.526M

$16.846M

(15.86%)

77.45%

Net income

$22.226M

$30.335M

$13.657M

(26.73%)

62.74%

EPS

$0.73

$1.02

$0.47

(28.43%)

55.32%

(Non-GAAP)

Revenue

$121.521M

$112.713M

$76.303M

7.81%

59.26%

Gross margin

57%

58%

56%

(100bps)

100bps

Operating margin

29%

34%

22%

(500bps)

700bps

Operating income

$35.123M

$38.742M

$16.853M

(9.34%)

108.41%

Net income

$32.752M

$34.546M

$15.872M

(5.19%)

106.35%

EPS

$1.08

$1.16

$0.55

(6.90%)

96.36%

Source: NVMI

If the Q4 numbers are out, then so too are the numbers for all of FY2021. FY2021 revenue increased by 54.46% YoY to a record $416.1M. GAAP EPS increased by 89.1% YoY to $3.12 and non-GAAP EPS increased by 86.9% YoY to $3.85. Operating margins benefited from higher volumes and sales of products with higher values, offsetting the rising costs NVMI encountered throughout the supply chain.

(GAAP)

FY2021

FY2020

YoY

Revenue

$416.113M

$269.396M

54.46%

Gross margin

57%

57%

–

Operating margin

27%

21%

600bps

Operating income

$112.386M

$55.570M

102.24%

Net income

$93.101M

$47.907M

94.34%

EPS

$3.12

$1.65

89.09%

(Non-GAAP)

Revenue

$416.113M

$269.396M

54.46%

Gross margin

58%

57%

100bps

Operating margin

30%

24%

600bps

Operating income

$126.331M

$65.172M

93.84%

Net income

$114.669M

$59.638M

92.28%

EPS

$3.85

$2.06

86.89%

Guidance calls for Q1 FY2022 revenue of $122-132M, an increase of 51% YoY at the midpoint. The forecast expects GAAP EPS of $0.78-0.96, an increase of 45% YoY at the midpoint, and non-GAAP EPS of $0.96-1.14, an increase of 50% YoY at the midpoint. Note that guidance includes contributions and expenses associated with ancosys, which was acquired earlier by NVMI for $100M in cash.

Q1 FY2022 (guidance)

Q1 FY2021

YoY

Revenue

$122-132M

$84.1M

45.07-56.96%

GAAP EPS

$0.78-0.96

$0.60

30.00-60.00%

Non-GAAP EPS

$0.96-1.14

$0.70

37.14-62.86%

Guidance did not extend beyond Q1, but management did add some color as to the rest of FY2022. The wafer fab equipment or WFE market is expected to grow by 10-20% in 2022 and NVMI expects to match if not exceed that number. From the Q4 earnings call:

“so we don’t give yearly – yearly guidance on a yearly estimation. But definitely when we are looking on the first and the second quarter, we are expecting it to be flat quarter-over-quarter and looking on the yearly revenues, we are definitely looking on a growth year. Estimation in the market right now is talking between 10% to 20% and we are supporting that.”

A transcript of the Q4 FY2021 earnings call can be found here.

The charts remain bullish with a caveat

It’s no exaggeration to say that FY2021 was the best year in the history of NVMI. Numerous records were set, giving the bulls plenty to cheer about. The stock has benefited from record numbers as the stock soared a whopping 107.5% in 2021 with much of it coming in the fourth quarter. However, 2022 has not been the same as the stock is down 25.7% YTD.

The chart above shows how the stock soared higher, only to decline in the new year. In doing so, the stock appears to have formed what appears to be a falling wedge. The two trendlines connecting the lows and the highs are converging together to create a wedge pattern. The stock has been moving down within the falling wedge, but this cannot continue indefinitely. The stock will have to decide whether it wants to break out of the wedge with a move higher or lower since it will eventually run out of room.

The good news is that falling wedges are usually a bullish reversal pattern, meaning that they are more likely to resolve themselves with a breakout above the upper trend line than they are with a break below the lower trend line. The stock has been going down, which means a reversal would flip the stock’s direction to up.

In addition, up is more likely for another reason. There’s an indication the stock has encountered support. The stock has recently bounced off what looks like support at $100 when it was in danger of falling below this price level, only to recover strongly to close much higher at $108. The presence of support was not unexpected since the stock encountered major resistance when it tried to move through and close above $100 at an earlier stage, something it only accomplished after numerous attempts. It is said that what used to be resistance becomes support, which is consistent with what has happened recently.

Furthermore, the bounce keeps the existing trendline at the bottom intact, which is important since it suggests the stock is heading higher with the trendline sloping higher, provided of course the stock does not fall below support on a subsequent attempt. If this were to happen, then the chart patterns would shift from a bullish stance to something much less so.

Why some may not want to be long NVMI

NVMI has a lot going in its favor, but it’s not perfect. If there’s one thing that may work against it, then it likely has to do with valuations. The table below shows the multiples NVMI trades at. As mentioned in a previous article, multiples for NVMI could be an issue for some. NVMI trades at a significant premium, whether compared to the sector median or to its five-year average.

NVMI

Market cap

$3.18B

Enterprise value

$2.85B

Revenue (“ttm”)

$416.1M

EBITDA

$121.3M

Trailing P/E

34.88

Forward P/E

30.64

PEG ratio

0.39

P/S

7.42

P/B

6.56

EV/sales

6.86

Trailing EV/EBITDA

23.51

Forward EV/EBITDA

17.42

Source: Seeking Alpha

For instance, NVMI now trades at 6.6 times book value, above its average of 4.2 in recent years and the sector median of 3.8. NVMI has an enterprise value of $2.85B, which is roughly equal to 23.5 times EBITDA on a trailing basis and 17.4 times EBITDA on a forward basis, which is again higher than most. NVMI may not be expensive per se, but it’s definitely not what you would call a bargain people should be rushing out to buy, especially in an environment that is unfavorable to stocks.

Investor takeaways

NVMI has had a difficult start to the year 2022. The stock has struggled along with many other tech stocks for several reasons. A big driver has been a change in stance by the Federal Reserve. The Fed has flooded the market with liquidity in the last couple of years to combat COVID-19, which has greatly benefited stocks, but the Fed now intends to reverse course by raising interest rates and ending QE.

Geopolitical tensions have also played a role. In fact, the stock hit the low of the year on February 24, which is no coincidence since that happens to be the day war broke out in Ukraine. The stock lost roughly a third of its value at that point, although the stock managed to recover off the lows. NVMI ended the day up as the stock market rallied towards the close.

It helped that February 24 was also the day NVMI released its latest earnings report. Recent reports have been bullish and the Q4 FY2021 report was no different. Several new records were announced. For instance, quarterly revenue grew by 59.3% YoY to a record $121.5M in Q4 FY2021, replacing the old high that was set in Q3 FY2021. The Q4 numbers helped make FY2021 the best year ever for NVMI. Demand appears to be as strong as ever.

The fact that the stock bounced the way it did should please the bulls, but that’s not all there is to it. The bounce happened when the stock approached a known support/resistance level. The stock had difficulties closing above this level on the way up, so it stood to reason that the stock was likely to find support on the way down. The bounce is evidence that the stock has found support.

The bounce also keeps the current trend intact, which is up. In addition, the charts have painted what looks like a falling wedge, which suggests the current slide is likely to reverse with the stock going higher. While it’s still possible for the stock to fall below support on subsequent attempts, the odds favor the stock moving higher with the stock close to support. Up is the path of least resistance.

I am bullish NVMI. An argument can be made that multiples for NVMI are somewhat on the high side. Fed policy creates added uncertainty for stocks, which may even necessitate getting out of NVMI at some point down the road. Geopolitical tensions are high, creating fertile ground for increased volatility. Anyone buying at this point has to face the risk of a stock market selloff if the crisis in Ukraine escalates and spreads to other regions.

Having said that, there’s a lot more to like in NVMI than not to like, short-term headwinds notwithstanding. While NVMI is facing rising costs, earnings growth is strong and it’s likely to remain that way. Most importantly, the chart patterns suggest the stock is more likely to be heading higher than lower with the way the cards are laid out. If that’s the case, then long NVMI is the way to go.