nLIGHT Stock: Why the Bears Are Wrong After a 50% Decline

nLIGHT Stock: Why the Bears Are Wrong After a 50% Decline
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nLIGHT Is a Bottom-Feeding Opportunity

Small-cap stocks are currently hemorrhaging in correction mode. While the Russell 2000 is not yet in a bear market, consider that about 70% of the components are below their respective 50-day moving averages and 48% are south of the 200-day moving average.

As a trader, you can look at the current scenario from two different angles: either it’s bad that stocks are heading lower or this is a good opportunity to accumulate positions.

It is never easy to pick a bottom, but what you can do is look at stocks that show the potential for longer-term gains. You may need to deal with some bumps along the way.

A high-prospects, small-cap technology stock that fulfills this criterion is nLIGHT, Inc. (NASDAQ:LASR). It blew out of the gate with an initial public offering (IPO) at $16.00 in April 2018 before surging to $43.63 in July.

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LASR stock has faded to the prevailing $21.00 mark, where the risk-to-reward ratio is intriguing.

nLIGHT develops advanced lasers and products that are used in semiconductors, industrial, and optical fiber applications.

The laser technology is commonly used in the manufacturing phase—allowing companies to develop and produce innovative end products.

And while nLIGHT stock is still early on in its growth, the company has over 300 clients worldwide in diverse areas in industrial, aerospace, defense, and microfabrication.

A look at the nLIGHT stock chart shows LASR stock breaking below minor support at $28.00 and currently resting at a key support level of $20.00.

There is a good chance nLIGHT stock could again break below $20.00 and retest its IPO price. This potential 20% decline matches favorably with the upside potential.

Chart courtesy of StockCharts.com

My Bull Case for LASR Stock

To be clear, nLIGHT has a limited financial history, so it’s more difficult to analyze.

In the company’s two reported years (2016–2017), nLIGHT grew its revenue by 36.8% to $138.6 million.

Fiscal Year Revenue (Millions) Growth
2016 $101.3
2017 $138.6 36.8%

(Source: “nLIGHT, Inc. (LASR),” Yahoo! Finance, last accessed November 15, 2018.)

Looking ahead, nLIGHT is estimated to increase its revenue base by 42% to $191.6 million in 2018, followed by a 15.7% increase to $221.7 million in 2019.

nLIGHT managed to expand its gross margin and turn earnings before interest, taxes, depreciation, and amortization (EBITDA) in 2017.

Fiscal Year EBITDA (Millions)
2016 -$1.24
2017 $17.72

(Source: “nLIGHT Inc.,” MarketWatch, last accessed November 16, 2018.)

LASR has attracted higher earnings-per-share (EPS) revisions—a positive sign and suggesting a higher valuation and price.

For 2018, nLIGHT is slated to earn an adjusted $0.46 per diluted share followed by a consensus $0.56 and as high as $0.65 per diluted share in 2019. (Source: Yahoo! Finance, op cit.)

nLIGHT reported positive free cash flow (FCF) in 2016, which is impressive for a company beginning to ramp up revenues.

Analyst Take

The critical lock-up period for early investors of LASR stock expired on October 23. The risk associated with this selling period is greatly reduced.

LASR stock trades at 31 times its high estimate for 2019, which is not unreasonable for a growth stock. The price/earnings to growth (PEG) ratio of 1.47 is cheap for nLIGHT.

nLIGHT stock is worth a look at its current levels or on a possible break below $20.00.