VICOR Corporation

Moat: 3/5

Understandability: 3/5

Balance Sheet Health: 4/5

Vicor Corporation designs, manufactures, and markets modular power components and power systems for converting electrical power.

Investor Relations Previous Earnings Calls

The moat, understandability, and balance sheet health scores reflect a conservative evaluation to ensure a margin of safety in any assessment.

Business Overview:

Vicor Corporation, often referred to as Vicor, operates within the power electronics industry, focusing on advanced, high-performance power systems and components for various applications. They specialize in providing modular power conversion solutions to serve different needs across the electronics market, and particularly focuses on high-performance and high-density power conversions. Vicor is known for its patented technologies and innovative designs. In layman’s terms they take electricity, and turn it into a different form. For example a 48 V DC could be converted into 3.3 V DC using Vicor parts.

Revenue Distribution:

Vicor segments its products into two main categories:

  • Brick Products: These comprise the traditional modular power converters, which Vicor has been making for a long period. A very large percentage of their revenue comes from this segment, and they are a known quality supplier in this space. These are very standard and commoditized, where the main things they compete on are price and service.
  • Advanced Products: The advanced products are more complex and have some more unique requirements. This segment offers higher margins and more growth. They often feature patented technologies and are sold to specific customers for a specific purpose.

The company breaks down revenue in multiple segments by geographical region and by product line:

  • Geographical Segments: A significant part of VICR revenue is generated from its operations in the US and Europe, while Asia is a major source of revenue growth.
  • Product Line Segments:
    • Brick Products: Vicor’s legacy product line, characterized by high volumes and relatively lower prices
    • Advanced Products: Specialized components with more advanced design, sold at premium prices and offering higher margins.

Industry Trends:

The power electronics market is characterized by the following trends:

  • Increasing Power Density: The need for more power in smaller, lighter packages is driving innovation.
  • Growing Demand for Efficiency: Companies are seeking high-efficiency power solutions to reduce power consumption, and this has a high importance across the electric vehicle market.
  • Electrification: The world’s trend towards electrification, which includes electric vehicles, charging stations and everything else that uses power, creates huge tailwinds for the power conversion industry.
  • Energy Efficiency: Power sources need to be more and more energy efficient, to conserve energy and lower cost of operation.

These trends have resulted in greater opportunities for companies that can provide higher power densities, improved energy efficiency, and higher reliability. It is a very competitive space with many entrants.

Margins:

Vicor’s gross profit margin in recent years ranged between 40% to 50%. The company’s operating margins have been between 10% and 20%, a very volatile performance compared to industry leaders. Net margins in recent years have been low, ranging between 2 and 8 percent.

Competitive Landscape:

Vicor operates in a competitive market with a variety of players:

  • Large Established Competitors: Companies like Infineon Technologies, Texas Instruments, Analog Devices, and ON Semiconductor have larger market shares, more diverse product portfolios and bigger balance sheets.
  • Smaller, Niche Players: These companies typically specialize in niche areas.
  • New entrants: the space is often very attractive and easy to enter, as power requirements are often standardized, but a moat requires special capabilities.

What Makes Vicor Different:

  • Innovation and Technology: Vicor focuses on developing and acquiring innovative technologies that provide unique benefits in terms of efficiency, power density, and size. They have accumulated a large amount of intellectual property (IP), and that helps them have high barriers of entry in the advanced part of their business.
  • Modular approach: Vicor’s modular approach enables faster design cycles, simpler integration of power solutions, and can result in lower costs of manufacturing, or time to market.
  • Vertically Integrated Manufacturing: They use their own equipment to manufacture their products, instead of outsourcing it to a third party. This gives them a great degree of control over their production processes and ability to provide quality parts to their customers.
  • Focus on niche applications: Instead of trying to compete in every single part of the power conversion market, they specialize in high-density, high-performance areas.

Financials:

  • Revenue:
    • 2022: $382 million
    • 2021: $365 million
    • 2020: $281 million Revenue has been growing, but the growth has not been very consistent. 2022 saw a growth of 4.6% , while 2021 saw a large 30% growth. In their most recent report, they reported 11.4% growth in Q3 Y/Y. Revenue in Q2 fell a bit short of expectations due to a global slowdown.
  • Gross Profit:
    • 2022: $173.7 million
    • 2021: $165.8 million
    • 2020: $118.3 million
  • Operating Income:
    • 2022: $50.6 million
    • 2021: $40.1 million
  • 2020: $3.2 million
  • Net Income:
    • 2022: $19.6 million
    • 2021: $17.0 million
    • 2020: $4.1 million
  • ROIC (Return On Invested Capital):
    • 2022: 12.4%
    • 2021: 10.8%
    • 2020: 2%

They have been growing revenues over the years, however that has not been consistent. Net and operating income has increased but is still very low when compared to the total revenue. Return on invested capital has been trending upwards, but it is still not at the level of industry leaders. A major factor in their profitability has been their inability to manage their expenses, which has led to less profits.

Recent Concerns and Management’s Views:

  • 2023 Guidance Reduction: In October of 2023 Vicor reduced their Q4 guidance of around $100-$110 million to a range of around $80-85 million. This is mostly due to inventory reductions by the customers, which caused less need to purchase from Vicor. This indicates that they do not have a high amount of pricing power.
  • Inventory Build-Up: They have noted in their latest earnings calls that their inventory is relatively high, but they are working on reducing it.
  • Gross Profit Margins: Gross profit margins fell slightly in Q3 2023 due to inventory reductions.

The management expressed confidence that they are working on fixing the above mentioned issues and also expressed that there are huge opportunities for their unique power conversion solutions in the future. They also seem to be focused on investing in new manufacturing capabilities.

Moat: 3 / 5

Vicor has certain elements of a moat, but it is still not as strong as companies that are leaders in their respective spaces.

  • Intangible Assets: They have a wide patent portfolio that gives them some differentiation. Their R&D is quite good, which is what allows them to develop innovative new products. Their intellectual property can provide a moat, particularly for the more complex and specialized products. They are known for innovation, but they are not the most well-known brand in the industry.
  • Cost Advantages: While they are not known to be a low-cost provider, their vertical manufacturing integration provides advantages and efficiency.
  • Switching Costs: In certain situations with their specialized products, switching costs could be high, especially in niche applications. A major benefit of switching is that they are able to get lower prices. If the products are specialized, then the switching costs would be higher.
  • Network Effect: Network effect is not relevant in this business.

Justification: While Vicor is able to leverage its patented technology, vertical integration, and some switching costs to their advantage, they still face a large number of strong competitors that compete on similar grounds. Their business does not give the kind of consistent profitability that we expect to see for companies with a wide moat. They have the potential to become a wide moat company if they are able to create a sticky relationship with their customers, and if their advanced product line gains more adoption in the coming years. I would not give them higher than a narrow moat, because that would indicate that their advantages would last for more than a decade, and I am not convinced that that would be the case with this company.

Risks to the Moat and Business Resilience:

The following risks could potentially weaken Vicor’s moat and affect its business resilience:

  • Technological Change: The power electronics industry is subject to rapid technological changes. It’s very difficult to predict where a specific new technology will come from, so being a technological leader does not come without its own specific set of risks. For example, if a new technology came in from a competitor which would completely change power conversion practices, they could be at risk.
  • Competitive Pressure: The market has many large players with huge R&D and production budgets. That makes it harder for the company to maintain a higher advantage over the long term. They compete against larger companies that also have more resources than them.
  • Customer Concentration: A larger portion of their revenue comes from a small group of customers. If those customers for any reason decide not to do business with them, or they decide to decrease their orders, that could have an effect on the business.
  • Product Life Cycle: Their highly specialized products have a higher profit margin, but they might have short product lifecycles. This makes it harder for the company to constantly create value. This risk is slightly minimized if they are able to get consistent recurring revenue.
  • Supply chain disruptions: Companies in the semiconductor space rely on various materials coming in from various geographical regions. Disruptions to the supply chain can affect their ability to produce products and affect the cost of making products.
  • Global Economic Slowdown: The market for power systems and components is affected by general global trends. Reduced economic activity may lower demand for their products.
  • Inability to compete with low-cost providers: If they don’t provide enough value or quality through their products, lower-cost providers could enter and win their customers.
  • Operational risks: Problems with their manufacturing processes, lack of qualified staff, or other unexpected events can damage their business.
  • Growth-Related Risks: The ability to sustain growth is difficult, especially for high-technology companies.

These risks can potentially affect Vicor’s ability to maintain or improve their profitability.

Understandability: 3 / 5

While the basic concepts of power conversion are easy enough to understand, this is a fairly complex business that is involved in a lot of engineering and other technology-related concepts. There are not many publicly traded companies directly related to what Vicor does. While it is relatively easy to understand how they earn revenues, it is difficult to evaluate the sustainability of their profits. This makes the understandability relatively average.

Balance Sheet Health: 4 / 5

Their current financial state is good, with a low amount of debt, but also not a large amount of cash and cash equivalents.

  • Strong Current Ratio: The company’s current assets have typically been greater than their current liabilities, indicating a strong ability to meet its short-term obligations
  • Low Debt: They don’t have a high amount of debt, they mostly rely on equity to run the business
  • Cash: Cash and equivalents are not extremely high, which can cause problems in the case of operational disruption.
  • Good liquidity position: The ratio of current assets to current liabilities is a bit high and gives them a stable platform to conduct business and make acquisitions.

Their balance sheet is pretty good, but could be improved with a bit more cash.