CyberOptics (CYBE) is a specialized member of the semiconductor industry thanks to their line of precision measuring systems. The high-precision sensors and systems are used to improve yields and productivity for a variety of tasks within both surface-mounted circuitry and wafers, including automated optical inspection or measurement (AOI), solder paste inspection (SPI), packaging inspection and metrology, wafer mapping, and more. As only a spectator of the semiconductor industry, I will not dive into the technicalities of the technology, but will use industry performance for my expectations.
With a company history dating back to the late 80s, CyberOptics has been providing their niche equipment for a long time. With this, the company has established customer relationships with most large semi-industry players, and performance is usually in line with the boom-and-bust cycles of the overall industry. This means that performance was great during the late 90s and early 2000s, but the typical bull cycle lasts only around 2 years. However, this is not true for the last five or so years, and this may signal a new trend is being established. The data suggests that CYBE’s customers are being supported thanks to secular growth and demand for semiconductor products, and this current trend may be enough to break through economic cycles that have plagued the industry in the past.
One look at CyberOptics’ historical price and valuation chart makes it clear that significant cyclicality is present. As a small company that provides advanced technical equipment, revenues come in waves as customers require the next generation of equipment. Historically, the best time to purchase shares was when profitability was non-existent and the P/S ratio was low. Then, investors could sell when the P/E ratio became low by the end of the cycle. This pattern is common with cyclical companies in commodity industries, and must be considered when investing in the company. This also suggests that it is currently a horrible time to purchase shares as the P/S ratio remains high, the P/E ratio remains low, and the share price is close to all-time highs. Although, perhaps the financials indicate the fundamentals are changing for the business.
As a public company for over 20 years, there is plenty of financial information to leverage. I will organize the data into two phases: the initial cyclical revenue period between the 90s and 2013, and the new linear growth phase between 2013 and the present. The initial cyclical period saw about two years of impressive revenue growth, usually reaching a peak of over $15 million in revenues per quarter, before having about 4-5 quarters of negative growth. Peak to trough declines can reach over 80%, but tend to average between 20-30%.
Then, soon afterward, CyberOptics had multiple quarters of 25%+ revenue growth right back to the highs seen around a year or two earlier. This pattern lasted many years, but the new linear growth cycle has been highlighted by reduced volatility. In fact, revenues have broken past historical ranges over the past year thanks to four consecutive quarters of $20 million revenues or more. The question is: will this pattern last, or is it just a major cycle?
Another way to look at it is through the earnings lens. As you can see, there is clearly a long-term, high-performance period occurring at the present as profitability has remained, even through most of 2020. No longer does the company see tremendous losses when revenues fail to cover operating expenses. During good times, the company is quite profitable, and it is a good sign to see that profitability can be maintained over a longer period. If the current 10-15% net income margin can be maintained in-line with the newly established 10-20% revenue growth rate, then the company will have a very attractive investment profile.
Looking closer at the company expenses indicates that there is room for both safety and continued growth. Earnings are mostly derived from operating expenses and revenues, as internal SGA expenses remain flat over time. While volatile, it is good to know that the company has fairly low unnecessary expenses and just relies on demand for their equipment. Another favorable data point is the fact that costs of revenues are becoming a smaller proportion of the overall expenses, which leads to the current phase of strong profitability. Again, the data does not indicate that this pattern will either continue or subside, and so we must continue to look for more information.
Perhaps the balance sheet will offer more information towards the health of the company. The most important balance sheet data point to consider is the strong cash to debt position of CyberOptics. While cash has been rising over the past 8 years to reach $18 million, only a minor $3 million debt position weighs on the company. While the shares outstanding chart seems scary on first look, growth has been limited to a 2.0% CAGR since 2014, mostly owing to share-based compensation. Perhaps another phase of buybacks is planned if the shares cool off over the next few quarters. The company certainly has enough cash to do so. However, I will be looking for FCF to remain positive on a more regular basis before believing the upward trend will be held.
To understand the potential of CYBE, I will use the customer base as an example. As shown in the company slides, major customers include manufacturers Taiwan Semi (TSM), ASML (ASML), KLA (KLAC), HP (HPQ), Samsung (OTCPK:SSNNF), Micron (MU), and more. All companies are performing well thanks to increased utilization of computer chip-dense devices, and this includes end point companies such as consumer electronics players such as Sony (SONY) or processing chip manufacturers like AMD (AMD) and NVIDIA (NVDA) that are driving our digital world. The graph below highlights the tremendous long-term momentum of the industries, but also shows that there will be times of weakness or volatility. When these companies succeed, CyberOptics’ equipment will remain necessary and drive revenues.
While financial performance is suggesting a new upward trend, I remain wary of investing at this point. I will follow the historical pattern of the share price by buying once things look dire. Then, thanks to the ever-present necessity of the semiconductor industry, performance will bounce back eventually. Sometimes it can be easy to follow cyclical names, and CyberOptics is one such company. I also believe the odds are stacked towards a breakout, so CYBE is certainly worth a deeper dive.
The strong balance sheet and niche technological platform are items to fall back on if you decide to be a recurring investor. Perhaps other contributors can chime in on the science and provide more information on the company’s outlook, but from my viewpoint, I will remain neutral. It certainly doesn't hurt to wait for the valuation to settle before initiating a position.
Thanks for reading. Feel free to share your thoughts in the comments.
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Disclosure: I/we have a beneficial long position in the shares of SONY either through stock ownership, options, or other derivatives. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.