Vicor: 3 Reasons Why We're Bullish

Introduction

Vicor Corporation (NASDAQ:VICR) is a small-cap stock that specializes in developing and manufacturing high-performance modular power components and power systems. These products are typically used by customers involved in terrains such as data-center infrastructure, aerospace and defense, telecommunication, and automobiles.

Vicor has faced a mixed year, filled with lots of volatility. It may not necessarily be everyone's cup of tea, but if you're someone with an aggressive risk appetite, we think this could be an intriguing pick. Here are a few reasons why we are prepared to be bullish on the stock.

Attractive Medium-Term Earnings Growth More Than Justify The Steep P/E

If one takes into account next year’s consensus EPS (FY24) for VICR that would translate to a hefty forward P/E (at current prices) of 32x. We would urge investors not to get put off by that number, and take a broader perspective.

We would be concerned by that number if this was a slowing business offering limited earnings growth per year, but the reality is a lot different. The image below provides the consensus EPS for FY23, FY24, and FY25, and what we can glean is that, on average, this is a business that is poised to generate 69% earnings growth per annum, all through FY25!

That is no mean feat, and we even think the FY25 consensus could be underestimating the added benefit that could from increasing 5G-related billings for VICR’s modules. Regardless, when a business is poised to give you 69% growth on average, not just for one year, but three years on the trot, a P/E of 32x shouldn’t be frowned upon (basically you’re looking at an implied medium-term PEG of 0.46x).

Also note that the current forward P/E works out to a massive 52% discount over the stock’s long-term average of 66x.

Solid Enough Balance Sheet

Whilst these multiples are in keeping with a typical growth stock, VICR’s balance sheet is certainly not. Unlike a lot of growth companies that inundate their balance sheet with debt, VICR does not carry any debt. The financial obligations, if any, are linked to some minuscule capital leases.

Crucially, the company’s cash balance continues to trend up over time and is currently at record highs of over $200m. Even though this is an asset-heavy business, it's also rather pertinent to note that VICR's cash balance makes the biggest contribution to the total asset base, accounting for 37% of all assets.

Encouraging Technical Landscape Supported By A Potential Short Squeeze Opportunity

To conclude, we also appreciate the recent developments on the charts.

If we first look at VICR’s weekly price imprints, note that since peaking in November 2021, until February this year, the stock went through a brutal downtrend, characterized by a series of lower-lows (LLs) and lower-highs (LHs).

Then from February to May we saw a flattening out of the price action at lower levels before a strong green candle in the second half of May. Note that after that candle, there was a pullback seen, but this time the stock did not retest the February lows, reflecting the underlying support from the bargain-hunters.

Then we saw a much stronger green candle in late July, and unfortunately whilst this candle’s strength has pretty much been washed out in the following weeks, we were encouraged to note that the stock bounced exactly at the previous pivot low of $51.96. This basically suggests that we may have witnessed a double bottom pattern at those levels.

Now, this is not a given, and next week when the company comes out with its Q3 results one may come across a few shockers that send the stock below those levels. We don’t expect a stellar quarter as sales and gross margins will likely be flat sequentially, whilst higher legal expenses could also weigh on the operating income.

However, even if that were to happen, your reward to risk equation of roughly 2.9x (the relative difference between the current share price and the upper end and the lower end of the trading range) is still quite encouraging at current levels, considering the trading range that has been established from February to July (the yellow highlighted area).

Then VICR also attracts a lot of attention from the short-selling club, but interestingly enough, the days-to-cover ratio has now crept up to rather elevated double-digit levels, the highest it's been since the pre-pandemic era. Combine VICR's high short interest of nearly 15% with this high days-to-cover ratio of 12 days, and you have a possible candidate that could benefit from a longer short squeeze.

The image below also suggests that VICR may benefit from some rotational interest for those who are focused on the industrial segment alone. Note that the current relative strength ratio of VICR relative to the Vanguard Industrials ETF is around 35% off the mid-point of its long-term range and may witness some mean-reversion.

Improved Stakeholder Positioning

Separately, it’s also worth noting that the massive level of discretionary insider selling which was seen in the first month of H2-23 appears to have abated in recent months, with no sales whatsoever in the current month.

We are also quite enthused to discover that the uptrend, following the bottom formation in May, has come with the support of the influential institutional investor community. Over the last six months, these guys have steadily increased their stake in VICR by 9%. VICR’s impending entry into the S&P Smallcap 600 index should start attracting greater attention from this cohort.