Long-term growth in the LED industry and the sapphire glass opportunity should help Rubicon Technology (RBCN) turn the corner, while its strong balance sheet should be an adequate buffer to support the turnaround. At a current market cap of well below its net tangible assets, Rubicon represents a value play in a market that is forecasted to experience substantial growth as LED lighting, and potentially sapphire glass, becomes more widely adopted.
Rubicon Technology manufactures sapphire products that are key components in LEDs and sapphire glass.
Thesis & Catalyst For Rubicon Technology, Inc.
While there are emerging alternatives to sapphire that can be used to manufacture LEDs, gallium nitride on silicon (GaN on Si) LEDs have not been produced in high volume to date. In fact, Plessey announced only this month the commercial availability of the first GaN on Si LEDs. While GaN on Si technology is potentially disruptive to Rubicon's business, as it allows for lower-cost production of LEDs, the Plessey units are low-output units that are not even suitable for general lighting applications. The company claims to be on track to deliver incandescent replacement LEDs "by the end of the year", according to a statement in LEDs Magazine.
I believe that Rubicon's substantial discount to tangible book value is a function of the supply glut that plagued the LED market in 2012 (more on that later) and fear of GaN on Si and other non-Sapphire LED technologies. However, demand for LEDs has already picked up since its low-point in 2012 and is forecasted to increase dramatically as LEDs become more widely adopted as an energy efficient alternative for general lighting. While GaN on Si and other disruptive technologies do represent a long-term threat to Rubicon (initially at the low end of the LED market and moving upmarket as the technology improves), sapphire may become more widely adopted as an alternative to Corning Gorilla Glass(tm) over a similar time horizon.
There are already articles that suggest sapphire glass may ultimately replace Corning (GLW) Gorilla Glass for smartphone screens as production costs decrease. Sapphire glass is already used to protect the iPhone 5 camera. At its current valuation, I believe that the (admittedly, more speculative) sapphire glass opportunity represents considerable upside for Rubicon even in the event that GaN on Si captures a sizable share of the LED market.
With a share price of $6.49, Rubicon has a market cap of $146M relative to net tangible assets of $225M. While much of its tangible assets are tied up in PP&E, that represents excess production capacity relative to current demand for its products, and inventory, the company has only $22.7M of total liabilities relative to $126.7M of current assets (according to Yahoo Finance). Given that the company has substantial excess production capacity, near-term capex is likely to be low relative to historical levels. In fact, in 2012, it was $11M relative to $48M and $49M for 2011 and 2010, respectively.
When demand was stronger, gross margin hovered near 50% while it was actually slightly negative in 2012. In 2010 and 2011, the company was able to generate over $29M in net income each year. That is more than 1/6 the current market cap.
At current valuation levels, I believe that a relatively bearish view of both Rubicon's position in the LED market and the adoption rate for sapphire glass is already priced in. The company's strong balance sheet should give it the ability to survive until market conditions improve while any upside in either of the company's markets could make it a considerably more valuable company.
In the LED market, Cree (CREE) is the market leader while other notable competitors include Plessey, SemiLEDs (LEDS), and Revolution Lighting (RVLT). Looking at CREE's premium valuation (>30x forward earnings, >2x total book value, etc.) provides a sense of the significant upside opportunity if Rubicon is able to improve its market position and execute on its turnaround.