Founded in 1981, based in Andover, MA, Vicor Company (NASDAQ: VICR) designs, develops and manufactures power modules for electrical power conversion. Most electrical appliances are often plugged into a wall outlet; the stream from the outlet is known as alternating current (AC) voltage. Vicor products convert AC voltage to direct current (DC) voltage used by the device or a subsystem/application within the device. Vicor products can further convert DC voltage to a higher or lower form of DC voltage required by a subsystem/application within the device.
Vicor has two business segments: Advanced Products (47.4% of FY21 Rev); and Brick Products (historical activity, 52.6% of FY21 rev). Vicor’s products come in the form of a chipset. Some of the advanced products are Pre-Regulator Module (PRM), Modular Current Multiplier Driver (MCD), and Voltage Transformer Module (VTM).
Advanced Products has utilized Vicor’s unique factorized power architecture for a range of 48V applications in the data center, AI, HPC, and automotive space. While Brick products are standard and customizable chipsets i.e. AC-DC converter, DC-DC converter, Intermediate Bus Converter (IBC) with applications in aerospace, electronics defense and industrial automation.
Vicor management, at the recent annual meeting of shareholders in June 2022, made a statement worth capturing here:
“In summary, the market opportunity in HPC is very large and growing, we have a clear technology advantage that we will grow, we also now have the manufacturing footprint and vertical integration to be successful, so no apologies.”
Vicor, in my view, is a cutting-edge company, poised to accelerate its technological advancement and embark on unprecedented growth. So the thesis here is that of technological innovation coming to market, the questions become: how good is the technology compared to the status quo; is the end user comfortable with the product; and how fast can the product enter the market. Nearly a decade ago, Vicor introduced an innovative 48V Power Factorized Architecture (FPA) chipset that still has no real competition in the market.
How is the quality of the product? Using high-performance computing as an example here (“HPC”; AI, data center, cloud computing, enterprise computing, and hyperscalers can be grouped under HPC), most data centers in the market run on conventional 12V, with the exception of Google’s data center. The 12V or intermediate conversion option in place, as you would expect, is inefficient compared to 48V. 48V increases voltage in systems by a factor of 4x, decreases current by a factor of 4x, and reduces dissipative power losses by a factor of 16x. The 48V FPA technology, according to Vicor, improves energy efficiency by 10%, which translates into greater computing density, thus saving electricity and enabling higher performance.
Is the end user comfortable with the product and what is the adoption rate? Google Data Center’s adoption of 48V demonstrates that the product works, however, the product faces 12V occupancy challenges, thus, the market has been slow to adopt 48V. That said, Vicor has established a relationship with the two largest CPUs, the three largest GPUs, the largest FGPA, and over a dozen AI accelerator vendors. Therefore, we expect Vicor’s topline to accelerate as next-generation CPU, GPU, FPGA and AI accelerators ramp up.
Business model and revenue accumulation
Vicor’s customers have traditionally been players in the aerospace, defense electronics, transportation, industrial equipment and industrial automation industries. For these players, Vicor designs, develops, manufactures and distributes standard and customizable power modules, ie 12V AC-DC converters (Brick Products). With the introduction of 48V (Advanced Products), Vicor is targeting 100 customers in high growth markets. Markets include HPC with SAM worth $3.5 billion, automotive with $5 billion SAM, aerospace and defense with $1 billion SAM, and industrial with $1.5 billion dollars SAM. Cumulatively, $11 billion SAM by 2026.
Vicor is expected to grow at a double-digit CAGR over the next five years, driven by Advanced Products revenues as Brick Products revenues decline steadily over time. Vicor intends to convert Brick Products customers to Advanced Products customers.
As of YE21, Advanced Products has accounted for 47% of Vicor’s sales, while Brick Products has 53%. By YE26, Vicor expects advanced products to account for 80% of total revenue. Vicor expects Advanced Product revenues to exceed Brick Product revenues in dollar value by YE22. Vicor’s total FY21 revenue was $359 million, representing a CAGR of 7.3% over the past four years. Advanced products in the same period grew around 18% CAGR, while brick products had a CAGR of less than 0.5% in the same period.
Vicor management is aiming for $1 billion in revenue by FYE26, driven by advanced products – I believe Vicor will grow double-digit CAGR over the next five years. For conservative calculation purposes, I modeled Vicor to reach $850-870 million by YE26.
Vicor’s strategy is to reach $1 billion in revenue by FYE26. This revolves around five key areas: 1. The high growth markets highlighted earlier; 2. Applications with difficult power delivery challenges; 3. Vertically integrate the new manufacturing plant; 4. Achieve operational excellence; and 5. Focus on specific top 100 accounts.
Multiple EBITDA: I got a price target of $78 using a 17x multiple on 2026 EBITDA of $244 million discounted at 6%.
PES: The model assumes EPS growth at a CAGR of 23.7% over the next five years, discounted at 6%. For comparison, EPS increased by 76.2% CAGR between 2018 and 2021. Price target of $73.
Perpetuity method: The model assumes that revenue will grow at a CAGR of 19% over the next five years, driven by an acceleration in advanced product revenues. Gross and operating margins improved to 58% and 25%, respectively for FY26, and a discount rate of 6%. Price target $75.
- Successfully execute the vertical integration program which is expected to start in 2H22, furthermore, show some traction to achieve the 65% gross margin and 35% operating margin target.
- Accelerating adoption of AI servers in a data center within HPC, with design wins for Vicor.
- An increase in design gains in the automotive space as the electrification of automobiles accelerates.
- Licensing revenue could accelerate market adoption of 48V, especially for customers reluctant to rely on Vicor as a sole supplier.
- Political/commercial tension. In fiscal years 21, 20 and 2019, Vicor generated 67.0%, 64.4% and 53.7% of its total revenue, respectively, outside of the United States. In addition, net customer revenues in China and Hong Kong, Vicor’s largest international market, were approximately 27.5% in FY21, 31.4% in FY20 and 22, 1% in FY19, respectively, of total net revenue. Therefore, a trade tension or dispute would negatively impact Vicor’s topline.
- As of February 16, 2022, CEO and Founder Dr. Patrizio Vinciarelli owns 80% of the voting shares, which limits the space for shareholder defense.
- Slower adoption of 48V, continued decline in Brick Products sales.
- Global economic uncertainty/recession.
- Limited clientele.
- Interrupted operation of the Andover installation.
- Extensive global supply chain disruption
Based on the analysis of this report, I issue a buy recommendation on Vicor with a target price range of $73-$78. The completion of the Andover installation and the implementation of the vertical integration allow Vicor to increase the utilization rate of the order backlog (~$424 million, up 22.6% in T1FY22) and reduce customer waiting time (~ eight months for Advanced Products and Five for Bricks products). The vertical integration program is expected to start in 2H22, therefore Q3FY22 and Q4FY22 results should provide evidence that Vicor is gaining momentum to accelerate revenue and improve margins.
Finally, further design gains in the HPC and automotive space and headline acceleration beyond model projections would warrant a positive revaluation of the stock.
Next Earnings Call
Vicor Q2FY22 Earnings Conference Call: July 21, 2022. 5:00 p.m. EST.