The Downside Risk For Navitas Stock

Navitas Semiconductor Corp. (NASDAQ: NVTS) has experienced a remarkable surge, with its stock price climbing nearly 300% from under $2 on May 22nd to over $8 currently. This significant increase followed Navitas’s announcement last month that Nvidia had chosen the company to power its next-generation artificial intelligence (AI) data center systems.

Navitas specializes in gallium nitride (GaN) and silicon carbide (SiC) technologies. Navitas’ role will be crucial in addressing key power supply scaling challenges for Nvidia’s powerful AI chips, including the highly anticipated Rubin chips, which are slated to succeed the current industry-leading Blackwell chips. That said, if you seek upside with lower volatility than individual stocks, the Trefis High-Quality portfolio presents an alternative – having outperformed the S&P 500 and generated returns exceeding 91% since its inception.

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What’s The Downside Risk?

Navitas Semiconductor faces significant risks despite the promising nature of GaN technology. While the probability of a U.S. recession has eased with subsiding trade tensions, persistent expectations of slowing economic growth don’t bode well for the semiconductor industry, directly impacting Navitas. The company’s fortunes are tied to the cyclical semiconductor market, which experiences considerable boom-bust periods. Navitas serves volatile sectors such as fast-charging adapters, AI data centers, solar micro-inverters, and electric vehicles. A slowdown in these end markets would directly impact Navitas’s revenue and growth.

The competitive landscape further exacerbates these risks. Navitas contends with well-established and resource-rich competitors including Monolithic Power Systems, Wolfspeed, Infineon Technologies, STMicroelectronics, and ON Semiconductor. Several of these, such as Infineon, Texas Instruments, and STMicroelectronics, are aggressively targeting the GaN market, potentially leading to margin compression and market share erosion for Navitas as the technology matures.

Financially, Navitas exhibits concerning fundamentals. In 2024, the company reported $83.30 million in revenue but posted losses of $84.60 million, indicating it’s losing more than it earns.

Navitas stock has recently experienced significant price volatility, underperforming the broader market during periods of uncertainty. For instance, NVTS plunged 84% during the 2022 inflation shock market correction, a far steeper decline than the S&P 500’s 25.4% peak-to-trough fall. More recently, the stock dropped over 60% this year, from $4 in January to under $2 in April, amidst tariff and trade tensions. In contrast, the S&P 500 index saw a more modest 19% decline over the same period.

The inherent volatility of the semiconductor industry amplifies these risks. If growth disappoints or the GaN market proves less lucrative, Navitas could experience severe multiple compression. Its current unprofitability leaves it vulnerable during downturns, lacking the financial cushion of profitable peers. Given its minimal profits and exposure to cyclical end markets, any slowdown in GaN adoption or broader semiconductor weakness could lead to substantial downside in its stock price.

While the Nvidia deal could certainly keep the stock price buzzing, investors will eventually weigh those prospects against Navitas’s steep valuation. Currently, NVTS stock boasts a price-to-sales (P/S) ratio of 20.5, a stark contrast to the S&P 500’s P/S of 3.0. It’s also worth noting that the average analyst price target sits at $4, implying a significant 50% potential downside for NVTS from its current levels.

Fundamentals take a back seat when investors get excited by the outlook. To reduce stock specific risk while getting exposure to the upside, consider taking a look at High Quality portfolio, which, with a collection of 30 stocks, has a track record of comfortably outperforming the S&P 500 over the last 4-year period. Why is that? As a group, HQ Portfolio stocks provided better returns with less risk versus the benchmark index; less of a roller-coaster ride, as evident in HQ Portfolio performance metrics.

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