My favorite stock in The Luskin Report’s model portfolios is Numerical Technologies. Now that I’m not running Other People’s Money in a mutual fund anymore, I’m free to buy individual stocks in my account for the first time in almost two years. Numerical Technologies was down sharply yesterday, and I took the opportunity to buy it. Here’s why.
Numerical’s technology is almost unbearably compelling. When Sean Donovan, my colleague at MetaMarkets.com first told me about it, he said they are in the business of painting one-inch lines with six-inch paintbrushes.
Sean meant that they enable the use of light to manufacture features in semiconductors that are smaller than the wavelength of the light itself. They call this “phase-shifting” — but as far as I’m concerned it might as well be black magic. But what’s the difference? It works — and they’ve got it patented.
Sub-wavelength features are critical for the semiconductor industry if it wants to keep reaping the bounty of Moore’s Law, the forecast by Intel founder Gordon Moore made decades ago that the transistor density of semiconductors would double every eighteen months. It always has so far, and that means that the miniaturization, speed and cost-effectiveness of semiconductors can double every eighteen months, too. And that steadily expands the market for semiconductors, and makes the semiconductor industry one of the most important manufacturing sectors in the global economy.
And one of the most viciously competitive. It’s a constant race, with Moore’s law setting the pace. Faster. Cheaper. Smaller. Sub-wavelength features make chips all three of those things. So if a semiconductor manufacturer wants to compete, it has to go sub-wavelength. And the state-of-the-art in sub-wavelength is Numerical Technologies.
Numerical helps its customers right from the design phase, with software that optimizes the design of sub-wavelength circuits. Then all the way through process design, manufacturing and quality control, Numerical is there with software, process automation, equipment design, and implementation consulting. Their design customers include Cadence and Seiko. Their photomask customers include Dupont Photomask, Photronics, and Dai Nippon. Their equipment customers include Applied Materials, KLA-Tencor, Zygo, and Lasertec. And their wafer fab customers include twelve of the twenty-five top manufacturers such as Intel, Motorola, Texas Instruments, UMC, and Fujitsu.
I know what you’re thinking — that customer list reads like a who’s who of the walking wounded. With customers like that, who needs creditors? But the fact that the semiconductor industry is in contraction is precisely what makes Numerical so important. If the semiconductor cycle bottoms out and heads higher, then any expansion in capacity is going to be in sub-wavelength, at the leading edge of technology — and profits. But if the cycle just wallows in the trough, or gets worse, then the industry will need sub-wavelength even more: capacity won’t expand, but everyone will be forced to upgrade to maintain competitive position and cut unit costs in the inevitable price war.
That makes Numerical Technologies a recession-proof tech stock. Numerical reported earnings for its second quarter (ended June) last July 11. Against an industry backdrop of shocking earnings and revenue shortfalls and downward forward guidance, Numerical blew away the Street’s estimates and then guided even higher. Only a year since their initial public offering, they are profitable, and they plan on getting even more profitable. Because they supply purely intellectual property, their gross margins are a stunning 90%. And since reporting, they’ve announced two important new customers, Taiwan Semiconductor and Qualcomm.
The Force is strong with this one. And just imagine what they will do when they get that paintbrush of theirs even smaller.
The views expressed within represent those of the author, and do not necessarily reflect those of Capitalism Magazine’s publishers.
