Vicor (NASDAQ:VICR) initiated with a strong buy:
I am initiating coverage on VICR with a strong buy rating and a price target of $26.00 a share. This target is based on earnings per share estimates of $.52 in 2015 and a 50 P/E ratio, which is supported by the forecasted 100% growth in earnings for 2016. There is very little liquidity in this stock and any good news will propel the stock price up substantially. Before today, there has been no analyst coverage on Vicor and they do not go on road shows or proactively present to the investment community.
Vicor has a plan to triple their revenue in five years, and this was discussed at the Vicor annual meeting and past conference calls. CEO, Patrizio Vinciarelli believes that after years in investing in developing their new technology, they are now in "harvest time." New products are expected to generate gross margins as a percentage of revenue in excess of 60%. With tremendous leverage in their earnings model, the operating margins are expected to return to 20%+. Vicor has a pristine balance sheet with over $50,000,000.00 in cash and no debt.
Insider and company stock purchases:
The company bought back $17,100,000.00 or 3,273,088 shares in 2013. The CFO, Jamie Simms quickly followed by purchasing 45,000 shares, and just recently the president, Dr. Vinciarelli bought 57,000 shares. Before this purchase, Dr. Vinciarelli owned 20,699,128 shares, over 50% of the outstanding stock. Needless to say, there is very little liquidity in this stock.
Vicor has invested over $250,000,000.00 in the last 10 years to develop new power supply technology that is currently shipping and additional new products will be announced throughout the year. As a result of this investment, Vicor has the highest performance, most efficient and smallest converters on the market with competitive prices. A portfolio of over 100 patents protects the Vicor products and provides a moat against competitors.
The excitement and real growth will be in the new CHIP and SIP products. The CHIP acronym stands for Converter Housed In a Package, and SIP, System In Package. These new power converters provide a high performance solution in a very small package and are very price competitive. Vicor is totally focused on driving cost out of their products, and the early success of the CHIPs and SIPs into cost sensitive markets validates that effort. In Vicor's latest conference call, Dr. Vinciarelli explained how some of Vicor's legacy Brick products were priced at approximately $1.00 a watt. Now, a CHIP or SIP solution could, under certain conditions, be priced in the cents per watt range.
Vicor has a long history of building very efficient and high performance products. While Vicor's previous generation of VI chip's were well suited for very high-end systems like super-computers, the CHIP and SIP products, while still providing the performance and efficiencies, are shipping in very large quantities to power Intel processors in low cost servers for a leading data farm company. This customer sale, which was discussed in recent conference calls, validates Vicor's products, performance, cost competitiveness and their ability to penetrate substantially larger markets.
Vicor's new products address new applications and new markets. The most significant design win for Vicor was with the data center when Vicor was selected to power their Intel processors. Now Vicor has a new design win, announced at their last conference call, from the same data center customer for powering their memory rails. The memory requires less power than the Intel processor, and uses a scaled down version of the CHIP product. A win like this was not possible with previous products, because of their cost. This win validates Dr. Vinciarelli's claim that their products can scale down in performance and still be cost competitive. Dr. Vinciarelli believes that there are other power supply opportunities inside the servers for the Vicor products.
Data center owners are very interested in the total cost of ownership and the Vicor CHIPs and SIPs configured in a "factorized power architecture," can save up to $500,000.00 per year per data center, by providing a very efficient solution that reduces, electricity use, heat and associated air conditioning.
Historically Vicor has been primarily in the DC to DC converter business i.e. their products were used inside electronics equipment after the AC is converted to DC. They have a division that makes AC to DC power supplies, but these tended to be custom and geared to the industrial or military market. Vicor has a new product called the PFM, (AC to DC) product that has gained traction in the marketplace including a win that was announced at their last conference call, into a micro-cell base station. They also discussed a reduced and smaller version that will be announced shortly and following that another improvement is planned. The AC to DC market is huge. Just look at the products in your house and or office that have AC to DC converters. Almost all electronic equipment has AC to DC converters including computers, servers, storage devices, LED lighting, etc. This new product has significant legs, and will open up a huge new market for Vicor, and the new business will be significant and incremental.
Vicor now provides cost effective building blocks from the AC wall socket to the point of load. This end-to-end solution gives engineers a seamless approach to designing their power trains with the highest performance and most efficient parts.
Even with the new technology, Vicor's VI chip and Brick businesses still have legs. Vicor has a number of large VI chip design wins in the super-computer and defense markets where the design cycle has been going on for years. These designs will finally be coming to fruition in the near future, and Vicor will be receiving production orders for their parts.
Vicor's legacy "Brick" business will get a shot in the arm with new "CHIP" inside products. This will allow that business segment to continue to grow.
The market for Vicor's products is a huge multi billion-dollar market. Dr. Vinciarelli has on numerous occasions explained how they have to prioritize opportunities, because there are so many. Their primary markets include, supercomputers, servers, transportation including automotive, test and Instrumentation, defense, communication, industrial, aerospace, LED lighting and Medical.
A new market for Vicor, that is perfect for their technology, is the electric and hybrid automobile market. By using the Vicor products the manufacturer can reduce the size and weight of their current power converters by a factor of 5. The reduced weight along with the efficiency gained by the Vicor parts will prolong the car's battery life. At the last conference call, Dr. Vinciarelli mentioned that they have made significant progress into the automobile market.
The power supply market is very fragmented and Vicor now has what it needs to be the undisputed leader in the power conversion market, and they will be taking market share away from others.
Vicor is in a lawsuit with Synqor, which involves a patent dispute and is costing Vicor up to $3,000,000.00 a quarter. The trial date is scheduled for October, and Vicor is confident in their position and they expect to prevail in the suit. Afterwards the legal expenses will decline dramatically. Here is a link to Synqor's press release relating to the suit against Vicor, and here is an article in EDN where Dr. Vinciarelli was asked about the Synqor lawsuit.
Leading business indicators:
Vicor is advertising for temporary production workers (machine operators and material handlers) on monster.com for their 1st, 2nd and 3rd shifts. I have followed Vicor for years and have never seen anything like this. Vicor announced in their first quarter conference call that they have received a very significant order (50,000 pieces of a CHIP/SIP set) from their data center customer and additional follow on orders are booked and more are expected. Also, Vicor is expecting significant orders for the super-computer and defense markets. I expect to see a strong ramp in bookings and revenues in the coming earnings announcements and picking up momentum in 2015.
The following forecast was provided by Alan Hicks with his permission. Alan has followed and invested in Vicor for over 15 years. He was President of Ainsley Capital Management from 1997-2007, and was Director of Research for Progressive Asset Management from 1995-1997.
Year Total Revenue EPS EPS growth rate
2014 $223,994,000 -$.36 N/A
2015 $300,500,000 $.52 N/A
2016 $397,000,000 $1.10 110.0%
2017 $496,000,000 $1.73 56.5%
2018 $599,000,000 $2.30 33.0%
A negative outcome of the lawsuit will obviously be a setback for Vicor. However, Dr. Vinciarelli explained in the last conference call that the sales of their IBC products, which are at the heart of this lawsuit, are now a small part of Vicor's overall revenue.
The other risk is that the Vicor plan will not pan out or will be delayed. Dr. Vinciarelli has stated many times over the years, that the inflection point for the company was "next year" or a couple of quarters away. Because of the numerous "false starts," I believe Vicor has lost credibility with the investment community. I personally asked Dr. Vinciarelli, at the annual shareholders' meeting in June, and on the last conference call, "what is different this time," and his reply was now they truly have a "cost card" that is evident from their sale to the data center to power the Intel processors. The competitive prices of their new CHIP and SIP products opened up mainstream markets to Vicor.
Because Dr. Vinciarelli, has complete control of Vicor with over 50% stock ownership, he was able to invest for years in the new products at the expense of short-term profits. This type of investment is rare these days, and Dr. Vinciarelli expects to see results in the form of revenue growth and profits. Dr. Vinciarelli explicitly stated that, after over 10 years of investing, it is now "harvest time."
We will see an array of new product announcements in the coming quarters and these new products, along with the previously announced products will drive revenue and profits.
There is very little liquidity in this stock, so any good news will quickly drive the stock higher, and I expect that good news will be arriving at the next conference call and will continue in the following quarters. The inflection point is right around the corner, and this stock is headed much higher.
Disclosure: The author is long VICR.
The author wrote this article themselves, and it expresses their own opinions. The author is not receiving compensation for it (other than from Seeking Alpha). The author has no business relationship with any company whose stock is mentioned in this article.
Additional disclosure: Vicor common stock is the largest position in my portfolio. In addition, I own a very small position of calls with expiration dates in October and January. You should consult your own financial advisor before acting on recommendations to consider its suitability for your investment circumstances.