Vicor, Providing Shovels to the (Data) Miners

Source: Daniel Carlson for Streetwise Reports   12/03/2018

A $1.5-billion market-cap power electronics company that is flying under the radar of most investors is profiled by Daniel Carlson of Tailwinds Research.

Vicor Corp. (VICR:NASDAQ) is a $1.5 billion market cap power electronics company that is just hitting the sweet spot of a hockey stick type secular transition to 48 volt architecture in exciting, high growth markets. These target markets include data centers, AI computing, and electric vehicles. All these markets are fast growing, but even better, they are transitioning in real time to the 48v architecture for which Vicor is an essential parts provider.

The company also has a stable core legacy business and is profitable. It has $68MM in cash, zero debt, and own its own facilities. Management also has significantly over 40% of the company. Yet, despite being a key partner in these growth industries, Vicor is an undiscovered gem with zero sell side research coverage. It should be noted, however, that Quinn Bolton (Needham) has been kicking the tires.

Vicor operates with two divisions. Its legacy business is manufacturing low margin brick power supplies. This is 50% of historical revenues and is beginning to rapidly decline as a percent of revenues. The other business is manufacturing Advanced Products that are used as enabling technology for ultra high-performance computing applications. These applications include AI, machine learning, big data, autonomous vehicles; applications that demand substantially higher current, performance, and efficiency that is pushing Moore’s Law beyond its limits.

As more companies seek to develop faster, cutting edge products based on 48v architecture, they will be forced to work with Vicor. In the words of CEO Patrizio Vinciarelli from the recent earnings call, “To paraphrase a director of purchasing at one of our customers, after being asked by a person that joined the company recently, in our presence, ‘what is Vicor’s competition,’ the answer was, ‘Vicor has no competition.’ And the reason why we have no competition is that we’ve been working at this for nearly 15 years.”

It’s not often you hear the words “no competition” in the electronics industry, but that’s how Vicor describes its current business in the high growth areas. This is music to my ears and what got me most excited about this company.

A historical overview of Vicor:

Vicor founder and CEO Patricio Vinciarelli invented the power brick in the late 1980s. This is still in use today in practically every electronic device; picture the transformer in the middle of your laptops’ power cord. However, the power brick business commoditized in the late 1990s and VICR patents expired. Most OEMs demanded offshore production for high volume low quality power bricks. Despite this move overseas, Vicor managed to keep a relatively stable high end mass customization business that focused on high power industrial equipment markets, semi-test, defense and other similar industries.

In the early 2000s, Vicor realized the limitations that the power brick would eventually face and began working on the next power paradigm. Free cash flow from its legacy brick business has funded a $400MM R&D effort to develop the newer Advanced Products. These new products directly addressed the foreseen issue that increasing power demands at lower voltages would eventually increase the challenges of power density and cost of ownership in a wide range industries including data centers, computing, aerospace, telecom, semi-test, LED lighting, automotive and others. The term used to describe these newer products is Factorized Power Architecture or FPA.

Here’s the issue: as power demands increase, distribution/transmission loss, connector loss and conversion loss lead to more heat, therefore requiring larger heat sinks and more cooling. This increases total ownership costs, reduces reliability and increases system size. In traditional power architecture, regulation and voltage transformation are connected, which limits improvements that can be gained.

However, in the next generation FPA architecture, both regulation and voltage are separated (factorized) allowing optimization of each. FPA allows for highest system efficiency and smallest system size: a typical high end server sees 9% efficiency increase and 45% reduction in both power loss and system size is realized. Efficient HV (high voltage) AC or DC distribution and power conversion to the loads is essential for modern power architecture.

Fast forward to today, and you’ll see that Vicor has spent the last few years working with early adoption customers such as IBM, Google, and Intel creating a broad offering of Advanced chips/modules for a complete next generation power solution. The company feels evangelization efforts are roughly complete and every recognizable name in the CPU/GPU space is now talking to them.

Examples of Vicor’s Advanced high margin products now shipping

  • Power on Package (PoP) – Vicor’s solution to eliminate the challenges of the last inch of power distribution to the XPU. If one believes Vicor’s CEO/founder then there is no competitor in terms of efficiency, density, w/less copper, less silicon, less PC board real estate, less packaging…all of which translates into less cost per amp. Production volumes began Q4/18. Vicor’s PoP is OEM in Nvidia’s new DGX2/HGX server line, (view 5 minutes into the video link). Jensen Huang Nvidia CEO claims these new GPU powered supercomputers incur 1/5 the cost, require 1/7th the space and draw 1/7th the power compared to conventional supercomputer racks. And Vicor’s PoP’s are inside all of them.
  • NBM – bidirectional 48v/12v back to 48v converter that allows datacenters/automotive to begin using more efficient (in terms of complexity and size), 48v power systems w/o the time and risk of a full scale 48v conversion. Datacenter migration from 12v to 48v will occur over many years, as there are many 12v legacy loads that need to be fed from 48v infrastructure. But these NBM modules allow Vicor to get their nose under the tent before the full architecture conversion later on.
  • 4G products slated for volume shipments in 2H 2019 will expand usage of all these building blocks as Vicor gets a bigger share of power delivery from the wall to the point of load.

Business is at inflection point

Vicor is at that key point in a product cycle in which the new products are going to start becoming a much larger part of the sales mix. This shift to more new product sales means that the overall growth rate of the company is going to increase. Legacy products are down to 55% of the overall sales in Q3 and, with next-generation products set to start growing up to four times faster, legacy sales should be below 50% of the total within a couple quarters.

At the same time as the growth rate increases, so does the gross margin. The newer products have a much higher gross margin and the mix shift is going to drive increasingly strong margins, something that is not very common in the electronics industry.

To put some context around the growth, and the leverage in the model as they start to inflect, look at these numbers:

  • Sales in Q3 were $74.2M, a 37% increase year over year
  • Bookings for advanced products increased 20.6% sequentially
  • One year backlog is $116.1M, a 12.6% sequential increase
  • Net income of $13M, up 66% sequentially

Vicor has been building towards this moment for several years. The company has bumped along with legacy products as they waited for the new markets to develop, markets in which they are well positioned. That time is now.

Nvidia’s weakness creates a buying opportunity

As one might suspect, forward thinking investors have been buying shares of Vicor in anticipation of the ramp in business. For the year, VICR is trading up 62%. This looks good on the surface, but, for those of us who didn’t get in early, it’s not too late. We have been given a gift horse as shares of Vicor have declined 50% over the last few months.

The weakness in VICR correlates with weakness in Nvidia. Nvidia is the market darling when it comes to pure plays on the growth in Artificial Intelligence computing as its chips are market leading. They are also poised to take tremendous market share in the data center space due to the speed of their processors. Over the past few years, Nvidia stock has soared based on this and, more recently, Vicor shares were moving along with them.

However, recently Nvidia has suffered a haircut. There are major concerns brewing over competition in AI. For starters, Google has directly attacked Nvidia with their TPUs, and now has its own hardware to power its growing AI Application empire. Hardware that is available to anyone who wants to train their deep learning algorithms in Google Cloud. There are also fifty or more AI startups targeting data centers and edge solutions along with other established big data players like Facebook and Alibaba ramping up their commitment to AI. The list goes on, but you get the hint.

This pain suffered by another pure-play on data centers has dragged down Vicor. But, don’t let concern over competition for Nvidia bother you with regards to Vicor. Instead, the competition should be relished. As more entrants jump into this market they will all have one thing in common: they are going to bake Vicor’s power management solutions into their offerings. There is no alternative.

Playing the move to 48 volts…

I expect to see shares of Vicor regain their swagger over the next few months. The slowdown in the semiconductor industry should have only a marginal impact on its legacy business. Meanwhile, its advanced products are just beginning to hit their stride in industries that are also young and growing rapidly.

I believe Vicor is a multi-year pure play on the transition to 48 volts, a transition that is going to be dramatic across several rapidly growing industries. Vicor’s products are market leading in the fields of data centers, AI, and, soon enough, electric vehicles. These three industries all have fundamental forces pushing them towards higher power and higher speed and elemental forces requiring they shift to 48 volts to remain competitive. Vicor is the best pure play on all of this.

Daniel Carlson is the founder and managing member of Tailwinds Research Group and its parent company DFC Advisory Services, which is a licensed registered investment advisor (CRD # 297209). Tailwinds is a microcap focused research company that provides research on and consults to over 20 emerging growth companies in the technology and life sciences arenas. DFC Advisory Services is an RIA that manages money dedicated to investing in the companies covered by Tailwinds. For more information on these two companies and their track record, please see www.tailwindsresearch.com. Prior to founding these two entities, Dan spent many years working with small public companies, having been CFO of two public companies and helping finance many others. A 1989 graduate from Tufts University with a degree in Economics, Dan’s formative years in business were spent as an equity trader, first on the Pacific Coast Stock Exchange then on the buyside at several multi-billion dollar firms.

This article was submitted by Tailwinds Research. For more information on Tailwinds Research or on Vicor, please visit www.tailwindsresearch.com.

Tailwinds owns stock in the company. For a complete list of disclosures, please click here.

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1) Daniel Carlson: I, or members of my immediate household or family, own shares of the following companies mentioned in this article: Vicor. I personally am, or members of my immediate household or family are, paid by the following companies mentioned in this article: None. My company has a financial relationship with the following companies referred to in this article: None. Additional disclosures and disclaimers are above. I determined which companies would be included in this article based on my research and understanding of the sector.
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