Luna Innovations Incorporated: 5G to Power this Micro-Cap Much Higher

Luna Innovations Incorporated: 5G Could Lead Stock Price to RiseLuna Innovations Incorporated a Great Play on 5G

There is some misconception that 5G mobile technology and fiber optics are competing technologies, but they are actually complementary. As 5G expands, so will the need for advanced fiber optic solutions. The tailwinds seem ideal for Luna Innovations Incorporated (NASDAQ:LUNA), a developer of advanced fiber optic test products used by companies in healthcare, telecommunications, energy, and defense.

Luna is a small company, with a market cap of a mere $174.4 million. Trading down about 20% this year and down about 40% from its 52-week high, Luna Innovations stock provides traders with a strong risk/reward opportunity.

A look at the recent trading history of LUNA stock shows the volatility, which you would expect with a company of this scale.

Luna Innovations stock jumped from $2.68 during the December 2018 low to $9.32 on February 12, prior to the sell-off. LUNA is currently hovering just under $6.00, but it could easily rally as the company continues to grow.

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Chart courtesy of StockCharts.com

Strong Fundamentals Support Bull Case for LUNA Stock

A look at the last five years shows Luna Innovations Incorporated’s revenues more than doubling from 2017 to a record level in 2019.

Fiscal Year Revenues (Millions) Growth
2015 $44.0
2016 $41.9 -4.9%
2017 $33.1 -21.0%
2018 $42.9 29.7%
2019 $70.5 64.3%

(Source: “Luna Innovations Inc.MarketWatch, last accessed July 27, 2020.)

And while we still don’t know the impact of the pandemic on Luna Innovations, the current estimates peg its revenues to grow 14.7% to $80.9 million this year and 14.7% to $92.8 million in 2021. (Source: “Luna Innovations Incorporated (LUNA),” Yahoo! Finance, last accessed July 27, 2020.)

Luna Innovations delivered positive earnings before interest, taxes, depreciation, and amortization (EBITDA) in 2018 and 2019.

Fiscal Year EBITDA Growth
2015 -$92,560
2016 -$1.1 Million -1073%
2017 -$1.0 Million 7.1%
2018 $2.6 Million 355.7%
2019 $5.8 Million 125.7%

(Source: MarketWatch, op. cit.)

LUNA also turned a profit based on generally accepted accounting principles (GAAP) over the last two years.

Fiscal Year GAAP Diluted EPS Growth
2015 -$0.26
2016 -$0.09 66.1%
2017 -$0.04 51.5%
2018 $0.07 252.1%
2019 $0.16 139.5%

(Source: MarketWatch, op. cit.)

Luna Innovations is expected to see its earnings fall to $0.18 per diluted share this year before rallying to $0.25 per diluted share in 2021. (Source: Yahoo! Finance, op. cit.)

Luna Innovations also generated positive free cash flow in 2019 for the first time in five years. I wouldn’t expect its FCF to remain positive though, given the continued need for investment.

Fiscal Year Free Cash Flow Growth
2015 -$5.8 Million
2016 -$1.9 Million 67.1%
2017 -$437,490 77.1%
2018 -$3.7 Million -744.1%
2019 $4.3 Million 215.2%

(Source: MarketWatch, op. cit.)

Furthermore, Luna’s balance sheet is healthy, which is generally not the case with small companies. It has strong working capital, minimal debt of $1.1 million, and $26.3 million in cash and cash equivalents. (Source: Yahoo! Finance, op. cit.)

Analyst Take

In my view, the strong fundamental picture for Luna Innovations Incorporated supports a forecast of a higher price for LUNA stock.

About 87 institutions own 41.2% of Luna Innovations stock, which is good for a small company. (Source: Yahoo! Finance, op. cit.)

We have also been seeing some insider buying, with 22,185 shares of LUNA stock being purchased by insiders over the last six months.