Description

LASR

I recommend entering a long position for nLIGHT Inc (ticker LASR), the closing price yesterday was $10.7/share. nLight is a small company (shares outstanding 47.3M, market cap 500M) focused on laser technology. This is a growth oriented bet (rather speculative, the company was losing money during the past few years, so position accordingly) on expanding into the defense market to capture "drone defense" work.

nLight Inc is headquartered in Camas Washington. It’s a vertically integrated leading provider of high-power semiconductor and fiber lasers. nLight sells these things:

(1): Semiconductor lasers with a broad range of power levels, wavelengths, and output fiber sizes. Typically used as an integrated energy source for OEM customers’ solid state lasers. The core building block is a compound semiconductor laser chip manufactured from a gallium arsenide wafer.

(2): Fiber lasers that are high-powered, programmable, quickly and easily serviceable, capable of operating in harsh environments, and have exceptional power stability. nLight’s fiber lasers use a proprietary active fiber that is doped with a rare-earth element to amplify the light from multiple semiconductor lasers into a more powerful beam.

(3): Laser sensing products that are highly efficient, reliable, cost effective and rugged; used for intelligence, surveillance and reconnaissance (ISR) applications.

(4): Directed energy products: fiber amplifiers and beam combination and control products for developing high energy lasers used by aerospace and defense.

to these end markets:

(1): Industrial 33.8% of 2023 revenue. (cutting, welding, additive manufacturing, cladding, heat treating, etc). Programmable fiber lasers are replacing older methods due to its increased speed, higher quality, lower cost; and enabling new technologies like additive manufacturing that was not possible.

(2): Microfabrication 22.6% of 2023 revenue. (creating three dimensional microscale structures). Preferences for brighter, more vibrant displays in phones, tablets, and the desire for thinner products with improved battery life and energy efficiency are placing greater importance on the need for smaller, more robust components, which will continue to drive demand for lasers.

(3): Aerospace and Defense. 43.6% of 2023 revenue. Directed energy defense systems utilize concentrated electrical or optical energy rather than chemical or kinetic force for attacking. The main benefits are: low-cost and unlimited magazine.

Revenue by end markets (dollars in thousands). None-defense revenue was dropping significantly due to diversifying away from China and deteriorating market

condition:

Cash flow summary for the past three years:

I hate tables and slides so there are only two. Just from looking at these two we see a terrible picture of decreasing revenue, unsubstantiated economies of scale story, thus explaining the 75% stock price drop since 2021.

Then why are we looking at this thing? Answer: the upside for nLIGHT is in its defense business: the US DoD has a pressing need for fiber laser defense system to combat asymmetric threats from low cost drones; and after years of R & D, the “technology maturation” is finally happening:

https://breakingdefense.com/2023/08/laser-weapons-finally-seeing-real-progress-missile-defense-agency-official-says/

Defending against drones will play an important part in future wars. After all, human cannon folder is now too expensive even for authoritarian regimes after decades of economic development. We will never see “battle of the Chosin reservoir”, or “vietnam spring offensive” again. Instead, as demonstrated by last year’s Hamas Oct 7 attack, Iranian strikes against Israel on 2024-04-13, etc, the first wave of surprise attack now is almost always a coordinated suicidal drone attack (with hundreds, thousands, or even tens of thousands of very cheap drones https://www.politico.com/news/2023/12/19/missile-drone-pentagon-houthi-attacks-iran-00132480 ) on the intelligence / surveillance network. Thus defending against drones in a cost effective way is vital. nLIGHT is one of the few companies having the expertise and capacity to meet US DoD requirements. 

One reason for the revenue drop over the past few years was nLight’s proactive divestment away from China. In 2016, close to 40% of nLight’s revenue was from China, now the percentage is like 5%. Also, nLIGHT is a US based company. Besides superior technology, these two are imperative for getting defense contracts from the DoD. (In comparison, nLight’s main laser industry competitor IPG Photonics was founded by some russian scientists and still has significant operations in russia.)

Let’s look at the margin picture (from nLight’s investor presentation slides):

If nLight is to reach 500M revenue in the next five years, at 30%-35% overall margin, the stock will definitely be worth at least $50 / share. This is a very big “IF”, but I think it’s worthwhile to enter a position now because:

(1): nLight has $115M cash on its balance sheet. Its business in “Industrial” and “Microfabrication” is near breakeven; so it definitely has no liquidity problem over the next few years.

(2): The stock has dropped 75% and stabilized at the $10 level for two years; and nLight has finished its diversifying away from China. Its cyclical industrial business is also not overearning now. So I think the potential downside is acceptable for the bet we are making in (3).

(3): nLight is perfectly positioned to benefit from increasing usage of laser technology in the defense industry (if that were to happen. Betting on this happening is the main thesis of this write up). In comparison, laser is a very small part of well known big defense industry players like LMT, RTX.

(5): Insider alignment. I haven’t discussed much about this, but nLight is still managed by its founder Scott Keeney whose stock holding (at the current depressed stock price) is more than 10x his annual compensation. There is a wiki page for this guy https://en.wikipedia.org/wiki/Scott_Keeney (although no wiki page for the company..)

RISK (This should be obvious)

(1): There isn't much defense spending on laser technology as I predicted.

(2): nLight's technology is actually not good enough.

(3): Current business lines begin to lose significant amount of money, causing liquidity problems.

Catalyst

large scale combat deployment of laser weapons

nLight capturing work from DoD