If you like CREE’s WolfSpeed segment, you will love II-VI.
If you like being long companies benefiting from multiple disruptive innovations that are opening up several new markets simultaneously, then II-VI is for you.
In many respects, materials science is ground zero for innovation in electronics. The chase to be the next Zuck has led to a boom of investment in the software + Internet categories in the last several years, but not as much in the areas of materials science, and we are delighted to find this kind of unique gem set to benefit from a confluence of multiple tailwinds.
II-VI (pronounced "two-six," and named for elements from the periodic table) products are set to benefit from many of the newest exciting growth trends in technology, including the rise of Gallium Arsenide based 3D Sensing, the adoption of Silicon Carbide into mainstream power conversion devices, the shift of semiconductor lithography equipment to EUV, the growth of optical communications in China, and new technologies used in military applications.
The recent selloff is helping to create a good entry point. At current levels we’d think there is -10% downside risk / and ~50% upside risk over the next 12-18 months simply using 25x trailing EPS today (-10%) versus 25x FY2 EPS (+50%). Based on our review of growth drivers, as well as the company's historical (organic) incremental cost investments, we believe the company will sustain a high-teens % top-line growth rate over the next two years, and along the way improve NIM margins by ~200bp. [Our math puts us a bit above management’s latest thoughts on growth, but below on margin improvement, and the net is we are probably below where management sees EPS two years out].
Drivers of growth include:
- Ramping new 3D Sensor materials for Apple using Vicsel technology
- Growing position in the SiC universe
- Supply CO2 lasers into EUVL from ASML at 1-2% content per total system price
- Levered to Chinese optical communications demand with a case for re-acceleration in 2018
- GaAS capability for military, semicap
- Multiple new drivers of demand for GaAS, SiC, and Indium Phosphide (future product) materials and products
- II-VI has been transitioning from supplying only bulk materials to also supplying Active materials (i.e. Epitaxial) that are used to grow electronics
IIVI is a mature company that is seeing ongoing demand in its core, but the real surge in growth is coming from the multiple new technologies and end markets we list above. Based on what we have reviewed, we think IIVI's revenue will be significantly larger in 3-5 years and we see the company's value continuing to grow alongside the rise of these new demand trends.
More to follow...
