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Quicklogic (QUIK) is a bit of a chip stock, which has seen its stock get nailed. It is technically a fabless semiconductor company. The company develops products for a variety of different applications, including industrial, aerospace and defense, consumer electronics, and computing applications. We think you can consider speculating here with the price so beaten down and the progress the company has made. It is not without risk, to be sure, but it would appear that the company is executing here. Shares are down mid-single digits here after hours at the time of this writing, and we think you can consider some. This stock does appear to have upside provided the execution can continue.

The suggested play

Target entry 1: $12.00-$12.20 (30% of position)

Target entry 2: $11.10-$11.30 (33% of position)

Target entry 3: $10.00-$10.20 (37% of position)

Target exit: $14 if one leg, $13.25 if 2 leg, $12.50 if 3 leg

Stop loss: $8.75

Options consideration: There are wide bid ask on the calls but the Jun 2024 $10 strikes can actually be sold for $0.25 which is sizable downside and likely to lead to the collection of premium.

Discussion

Before delving into the just-reported Q1 earnings, we wanted to be clear about what the company actually produces as a fabless semi play. The company focuses on Field Programmable Gate Arrays, or FPGAs. If that sounds really foreign, it is simply a type of integrated circuit that allows for the development of custom logic for rapid prototyping and final system designs. So, this is kind of where the name QuickLogic comes from, if you think about it. So first, QuickLogic has embedded FPGA (eFPGA) IP which is essentially intellectual property cores that can be integrated into other chips to add reprogrammable logic functionality to improve efficiency. They also have discrete FPGAs which are FPGA chips that provide even more logic resources than eFPGAs. They have FPGA SoCs which so called "System-on-Chip" devices that combine an FPGA with other processing elements, and ultimately are offering endpoint AI solutions to its customers and partners. Now that you have a very simple foundation of what the company does, and you can learn more about these processes on QuickLogic's website, we believe the growth and the value are finally at the right combination to dip your toes in here given the just-reported results.

QuickLogic's Revenue is volatile quarter-to-quarter but up sizeably from last year

Sales were strong. Total revenue for Q1 2024 was $6.0 million, an increase of 45.3% versus Q1 2023. However it was a decrease of 19.7% compared with Q4 2023. This was a very slight miss versus estimates. So-called 'new product' revenue hit $4.9 million Q1 2024, an increase of $1.8 million, or 59.6%, compared to Q1 2023. This was a result of higher eFPGA IP license and professional services revenue as QuickLogic has moved to its next phase of the large eFPGA contract and higher device revenues in place. So called 'mature product' revenue was $1.1 million Q1 2024. This was flat from Q1 2023, but rose sizably from $0.7 million in the fourth quarter of 2023. Overall, this is solid performance, and reflects quarter-to-quarter variability.

QuickLogic's Q1 2024 margins and earnings improve

So here is the deal. When we are looking to find a name to speculate in, we like seeing sales improve, but we really like seeing margins expand. Margins are expanding from a year ago. Q1 2024 GAAP gross margin was 66.3% compared with 57.8% a year ago. Bears will point to this being less than Q4, but up over time is the goal. Adjusted gross margin in Q1 2024 was a whopping 70.3% compared with 59.7% a year ago. Now, despite a surge in sales and gross margin, we did not see a massive surge in operating expenses and this is a very bullish sign on future profitability. Q1 operating expenses were $3.8 million compared with $3.5 million in Q1 2023 and up marginally from $3.7 million in Q4 of 2023. Adjusted operating expenses were $2.5 million which was down 14% from $2.9 million a year ago, and down 19% from Q4 2023's and $3.1 million. This is a major win folks. Boiling it down we saw a positive net income of $0.1 million, or $0.01 per share compared with a net loss of $1.2 million, or $0.09 per share a year ago. On an adjusted basis, net income was $1.7 million, or $0.12 per share. This is a big swing from a net loss of $0.5 million, or $0.04 per share a year ago. This was a substantial beat versus estimates as well.

Looking ahead

QuickLogic certainly operates in an exciting field and works with many partners in AI. The company has a number of IP contracts and continues to sign more each quarter. They are working in the commercial space with a partner (Zero-Error systems). The company also announced the expansion of SensiML's business model to include open-source licensing which as part of the release SensiML secured a six-figure license agreement with a "major microcontroller company." In terms of performance, the company is targeting a 30% revenue increase from 2023. That is solid. Now, it is expensive, somewhat valuation wise, but valuation has improved dramatically in the last year. A 7X price to sales, and 35X FWD earnings seems appropriate to pay for the growth. EPS of $0.35 is very likely after this EPS beat, maybe even $0.40. Taking the high end, that is 30X FWD here at about $12.15. At this level, with this growth, we think this is a good name to consider speculating in.

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