Nova Ltd., formerly known as Nova Measuring Instruments, was established in 1993 and is headquartered in Rehovot, Israel. It provides metrology solutions for semiconductor manufacturing. Their offerings include optical and X-ray stand-alone systems and integrated optical units for wafer production. These systems measure film thickness, composition, and critical dimensions during semiconductor fabrication. The product line includes in-situ and stand-alone metrology platforms for dimensional measurements and process control. Key products are NovaScan 2040, NovaScan 3090Next, Nova i500, Nova T500, Nova T600, and Nova V2600 TSV metrology systems. The company has over 1,100 employees.

The company primarily operates in China, which contributes 39% to its total sales. Taiwan accounts for 22% of sales, Korea for 18%, while the US generates 14%, and other regions make up the remaining 9%.

Guidance signals continued success

The Company has successfully acquired Sentronics metrology GmbH, a prominent global provider of wafer metrology tools for backend semiconductor manufacturing. R&D expenses made up 16% of total revenues, reaching US$110.2m, underscoring a commitment to maintaining technological leadership through initiatives like Path Finding, Incubation, and the Early Access Lab to Fab Technology.

The company aims to post sustained growth through FY 27, targeting an operating margin of between 28% and 33%. It anticipates revenues of over US$1bn, with R&D investment ranging from 15% to 17%. The strategy includes expanding total addressable markets by exploring new metrology applications and sectors, providing solutions for advanced logic technology nodes, scaled 3D-NAND memory, and DRAM devices for leading-edge clients.

Improved gearing

Nova has posted strong revenue CAGR of 17.4% over FY 21-24, reaching US$672m. Operating income rose at a CAGR of 18.6% over the same period, reaching US$188m in FY 24, along with a robust increase in margins expanding by 64bp to 27.9%. Net income outpaced revenue, with a CAGR of 25.4% to US$184m in FY 24.

Net income led to positive FCF over the last three years (FY 21-24), reaching US$176m in FY 24 from US$107m in FY 21. As a result, cash and cash equivalent increased from US$127m to US$158m by end-FY 24. However, total debt also rose, but at a slower rate, from US$221m to US$236m during the same period. Consequently, its gearing improved from 46.6% to 25.5%.

In comparison, Broadcom Inc., the company’s peer, outperformed, with a revenue CAGR of 23.4% over FY 21-24, reaching US$51.6bn in FY 24. Operating income grew at a CAGR of 21.3% to US$15.5bn. However, net income dropped at a CAGR of 4.4%, reaching US$5.9bn.

Looking ahead, analysts anticipated revenue CAGR of 14.3% over FY 24-27, reaching US$1003m. In addition, analysts expect EBIT CAGR of 14.9% to US$333m, with margins expanding by 47bp to 33.2% in FY 27. Net income CAGR of 16% to US$287m. Likewise, analysts estimate an EBIT CAGR of 23.1% and a net profit CAGR of 81.1% for Broadcom.

Analysts' sentiment is positive

Over the past year, the company's stock has delivered modest returns of approximately 3.6%. In comparison, Broadcom’s stock has delivered higher returns of about 73.1% over the same period.

Nova is currently trading at a P/E of 30.4x, based on the FY 25 estimated EPS of US$7.7, which is higher than its 3-year historical average of 28.3x, but lower than Broadcom’s valuation of 57.4x. In terms of EV/EBIT, the company is currently trading at 24.3x, which is higher than its 3-year historical average of 20.8x but lower than Broadcom (30.5x).

Nova is largely liked by seven analysts, with five of them having ‘Buy’ ratings, one having ‘Outperform’ rating and one having ‘Hold’ rating, with an average target price of US$254.1, implying 9.1% upside potential from its current price.

Overall, the company achieved notable financial performance in Q1 25, due to strong demand for advanced semiconductor metrology solutions. The company reported considerable growth in both net income and operating income, surpassing analysts' expectations. Nova's ongoing focus on research and development highlights its dedication to innovation within the semiconductor industry. Successful acquisitions have strengthened its market position, and the company's strategic outlook indicates continued expansion and ongoing revenue growth in the future.

However, the group faces several risks, including cybersecurity threats and complex computer crimes may disrupt operations. Dependence on international sales exposes us to foreign political and economic risks. Protecting intellectual property is crucial, as litigation could divert resources and deter customers from our products.