- Intermolecular has cornered a unique platform to accelerate the process of research and development.
- As technology matures, there is a growing need for research efficiency which can directly translate into cost savings and accelerated revenue.
- While Intermolecular has seen its stock fall, the price drop has failed to reflect the ongoing progress made by the company's business model.
- Intermolecular has continued to build upon its intellectual property portfolio thereby securing long-term revenue streams from partner companies.
It is not often when the market appears to misjudge a company's fair valuation. However, in the case of Intermolecular, Inc (IMI) this grossly appears to be the case. Intermolecular is the owner of the High Productivity Combinatorial [HPC] platform. The company's high-throughput platform combines parallel processing capabilities, characterization, and informatics in order to accelerate a company's research & development learning cycle. Using the HPC platform, partner companies can increase their learning processes by a factor of 10 to 100 times. This can significantly increase the productivity of a company's research and development cycle.
The R&D Problem
Intermolecular focuses its business in the semiconductor and clean energy space. Here we see several advantageous trends to this platform that bode well for Intermolecular's growth going forward.
- Growing process R&D costs
- Increasing use of new materials
- Increasing complexities in architectural design
- The lack of dedicated R&D systems
Despite the industry's high dependence on R&D for ongoing innovation, there has been limited progress on the front of creating dedicated R&D platforms. Instead, top-tier companies have often relied on using volume production manufacturing tools in order to conduct their in-house learning trials. Quite often this results in a highly inefficient process that also uses outdated methodologies from a productivity standpoint. It also takes away a valuable production unit from the manufacturing line.
The following takes a look at case study results between two of Intermolecular's clients found in Guardian and SanDisk (SNDK). Guardian is a private glass producer with over $5 billion in total revenue who is now looking to bring new products to the clean energy space. SanDisk is a $16.8 billion flash storage company who recently conducted $6.17 billion in revenue for 2013.
In each of these instances, Intermolecular was able to significantly increase the productivity of each company. For Guardian, its relationship with Intermolecular resulted in R&D results that took 1-2 years compared to the 4-5 years it would have taken with only internal resources. For SanDisk, the ongoing research also provides accelerated innovation along with a competitive intellectual property [IP] position for its new technology.
When it comes to the rapid advances being made in technology, it is this competitive drive to bring new innovation to the market faster that allows for companies to succeed. The opportunity cost of time otherwise lost to less efficient practices was summarized in a 2014 presentation found here by Intermolecular's CEO, David Lazovsky. Citing a project example with semiconductor partner, Micron Technology (MU), Lazovsky shows how expensive time can be. He stated the following:
"In my iPhone 5 is the 30nm DDR3 DRAM chip that's manufactured by Micron (formerly Elpida) in Hiroshima, Japan. We developed a capacitor for that technology and we helped Elpida accelerate time to market for that product when they were moving from 40- to 30-nanometer. A 30-day acceleration in time-to-market for that product was worth over $435 million of incremental revenue on a fixed asset base."
-David Lazovsky, CEO of Intermolecular, Inc.
For every 30 days that Intermolecular was able to bring the product to market quicker, the company was able to provide $435 million of incremental revenue to Micron on a fixed asset base. Such a value proposition has allowed the company to gain top-tier partnerships in its target market spaces. Along with Micron, Intermolecular has collaborative development partnerships with Toshiba (TOSBF), GLOBALFOUNDRIES, First Solar (FSLR), and Epistar to name a few.
The Advantage of the Business Model
At its current market capitalization of $175 million, Intermolecular appears undervalued in light of its long-term growth potential. The company has managed to forge volume-based royalty arrangements into the priority projects of Tier 1 industry leaders found throughout the semiconductor and clean energy space. Intermolecular also continues to add to its list of clients. Combined, Intermolecular's current clients support total revenue estimates of $40 billion in 2013.
Intermolecular's clients pay for partnership services and equipment purchases while Intermolecular retains the program IP. Clients also pay license fees to use the HPC platform and provide enduring royalty streams once the R&D results translate into volume production. Intermolecular therefore gets paid for its services while it also pads its long-term revenue potential with every new collaborative development program. By harnessing the ability to significantly accelerate research & development, the company maintains a significant advantage yet to be fully grasped by investors.
The ability for Intermolecular to integrate its growing revenue base directly into the success of its partners' revenue streams allows for compounding growth for Intermolecular. This is only made possible through its win-win relationships. Whereas Intermolecular can advance the revenue and achieve significant cost savings to partners, the company also maintains enduring access to the success of its partners' innovation.
Such is the advantage of the company's growing IP portfolio. As of 2013, Intermolecular has 1230 US patents and patent applications. In 2011 and 2012, the company had 730 and 971 US patents and patent applications respectively. Increasingly, the amount of collaborative program IP has continued to grow. For 2011, 2012, and 2013, program IP made up 25%, 37%, and 47% of these patents and applications respectively.
A Look At The Company Now
It is an understatement to say that Intermolecular's stock did not have a very good 2013. Over the past year, Intermolecular saw its stock fall over 59% as the company's slowing revenue growth and lack of profitability weighed on the overall sentiment. Intermolecular also trades with a very small investor base. Based on the 3-month average volume of 168,452 and the last stock price of $3.83, Intermolecular has a mere $650,000 of shares traded daily.
With a market capitalization of $175 million, Intermolecular now trades at a price-to-book ratio of 2.05 and a price-to-sales ratio of 2.58. The company saw stagnating revenue for 2013 but remains poised for continued growth going forward. Part of the largest misunderstanding behind this company lies in the fact that margins are set to significantly improve over the long-run.
Licensing and royalties account for a little over 20% of the company's revenue today, but Intermolecular expects for this to be more than 50% of the revenue in the future as project IP continues to mature. Why this is significant is due to the fact that these revenues carry gross margins of about 99% and expand for many years in the market.
Nevertheless, these IP revenue streams require multi-year product cycles as partner companies convert R&D innovation into volume production. Therefore, while revenue may have slowed in 2013, the reality is that the royalty stream arrangements remained intact. The company's profit snowball continues to be built in the background even if the front-end progress appears to have slowed.
There is no doubt that Intermolecular will require several more quarters before the growth potential truly begins to show. However, several projects are already anticipated to be converted into volume production this year. Additionally, the company expects to be cash flow positive this year. With total assets of $123.68 million and total liabilities of $38.17 million, the company carries a very strong balance sheet. This is particularly so considering the $78.28 million in cash held by the company according to the full 2013 results found here. The net loss for the year was a mere $8.8 million.
Armed with a strong balance sheet, limited losses, and a growing project base, Intermolecular looks poised for a strong 2014 and beyond. There is always a downside risk for technology failures when it comes to market adoption, but the company remains grouped with the leaders in their respective industry space. This advantage should help to mitigate this potential long-term issue. At its current price, Intermolecular appears to carry limited downside risk over the long-run. It also supports significant upside potential as prior R&D continues to translate into volume production for its partner companies. For investors, Intermolecular remains a speculative long-term buy at these current levels.