Photo by Jonas Svidras on Unsplash

I last wrote about Nova (NVMI) as the Bull of the Day in June after a strong beat-and-raise quarter lifted shares from $90 to $110 in two weeks.

Once I saw the return to growth, I was happy to jump in at $110 in late May for my TAZR Trader group. Shares rallied above $125 in July and then came off into their Q2 report on August 3.

But analysts were compelled to raise estimates again, pushing the stock back to a Zacks #1 Rank (Strong Buy) this month. The Rank may slip to #2 (Buy) this week, but it's right on the cusp of the top 5% strata in what I like to call the daily "bell curve cage match" that is the Zacks Rank quantitative model.

What's Ahead for NOVA as Semiconductor Lieutenant?

Since semiconductor general NVIDIA (NVDA) reports earnings on Wednesday -- and I expect a nice beat-and-raise from Jensen "the Godfather of AI" Huang -- you can bet Nova will reach for its highs again very soon.

While I've been calling NVIDIA the "King of AI" and CEO Jensen "The Wizard" for years, the "Godfather" label came from Dan Ives of Wedbush on Monday morning, who added...

"We expect a bullish outlook from Nvidia that should be the fuel in the engine to continue this tech rally into the rest of the year despite the tough talking Fed with Jackson Hole/Powell speech around the corner this week..."

For some background on why Wall Street analysts are (now finally) climbing over the top of one another this month to raise estimates and price targets for NVIDIA, see my June article and video...

We'll look at the growth opportunities for NOVA in an area called the "trailing node" right after we get to understand their core evolution.

NOVA LTD, formerly known as Nova Measuring Instruments, is based in Rehovot, Israel.

Here's how the company describes their mission...

Nova's advanced multidisciplinary dimensional metrology technologies combine complex opto-mechanical hardware with advanced optics and cutting-edge algorithms to continuously innovate for effective process control throughout the semiconductor fabrication life cycle.

And here's what I wrote in my early June article on NOVA...

Where Does NVMI Fit In the Semi/AI Ecology?

Metrology is the science of measurement and nowhere is precision more needed than in the "nanosphere" of chip manufacture. A nanometer (nm) is one billionth of a meter, and this is the distance of measurement for engineering transistors onto an integrated circuit (IC) board or card.

Chips have been plunging below 10nm for the past few years as Moore's Law gets new life from GPU pioneers like NVIDIA. For comparison, the coronavirus is about 50nm.

I explained some of this in my Top Stock Picks video about Nova on Tuesday, where I also suggested that this little engineer of Semi precision and purity may be an acquisition target for larger wafer fabrication equipment (WFE) companies like Applied Materials (AMAT), Lam Research (LRCX) or KLA.

For less than $10 billion, any of these $50-100 billion Semi engineers could "bolt-on" Nova and secure their dominance in precision purity manufacturing.

You Can't Spell Innovation Sans NOVA

Rehovot, Israel, December 20, 2022 – Nova (Nasdaq: NVMI) announced today that a leading global logic manufacturer recently selected Nova ELIPSON™ for next-generation integrated circuit (IC) development.

Nova ELIPSON™ was chosen for its ability to perform in-die characterization of stress, strain, and defectivity in next-generation devices, rapidly and with unparalleled sensitivity. The solution utilizes advanced Raman spectroscopy technology to extract materials properties of in-die structures, by fast and non-destructive means. The platform has consistently proven its ability to solve a wide range of materials metrology challenges in various segments and steps.

“This selection by one of the world’s leading semiconductor logic manufacturers demonstrates the growing value of Nova’s innovative materials metrology portfolio,” stated Eitan Oppenhaim, Nova’s president and CEO. “The increasing complexity of device architecture demands solutions that push the envelope and address the unique challenges our customers are facing. In this complex process fabrication environment, Nova’s unique materials portfolio is becoming critical to the successful manufacturing of next-generation devices.”

This is one example of how sales growth is returning for this small player in the $10 trillion market for AI.

What is the Trailing Node?

In early July, I wrote an article on Global Foundries (GFS), the US-based semi "fab" operator. Ironically, the creation of GFS was borne in 2008 of a spin-off where Advanced Micro Devices (AMD) decided it didn't want to do the foundry work anymore on its own chip designs.

Here's an important excerpt relevant to NOVA...

Nodes in semiconductor manufacturing indicate the features that a node production line can create on an integrated circuit, such as interconnect pitch, transistor density, transistor type, and other new technology.

This is especially important as the "leading edge" of chip design focuses on the sub-10 nanometer transistor architecture that also places new demands on the "trailing edge" that has to be able to "connect and keep up!"

In May of 2021, as supply chain issues were intensified by the pandemic shutdown, Tim Bajarin wrote this in Forbes...

"In the last few months, much has been said about the shortage of chips developed on leading edge manufacturing nodes of 7nm, 5nm, etc. While there are some shortages in chips using these advanced manufacturing processes, it turns out the semiconductor industry's other issue is at the trailing edge. The leading edge gets all the attention because it is the most exciting."

Bajarin had a good grasp at the time that the "leading edge" of chips powers the supercomputers in the cloud, advanced servers, desktops, and laptops, and even the computers in our pockets. But he explained that computing devices are not just made up of leading edge microprocessors...

"The vast majority of other components are made up using legacy nodes. Quite often many mainstream processors, especially those created for the autos, medical monitoring equipment, and a multitude of other products are created using much larger nodes in what is called the trailing edge."

These are the semiconductors chips and systems that still need to be able to "talk" to each other regardless of proprietary platforms, sub-10nm, or AI integrations on the "leading edge."

The Foundry-WFE Landscape

One of my favorite semiconductor analysts is Mark Lipacis from Jefferies. He helped me see in 2016 the potential for NVIDIA gaming GPUs to be supplanted by the data-center demand for those same workhorses of "massively parallel architectures."

In March of 2017 as I continued to gobble up information on how GPUs were creating the foundations of Artificial Intelligence -- even before the landmark victories over Chinese Go and Texas Hold'em that I described in October of 2017 -- I wrote the following piece and quoted Jensen the Wizard...

“DGX-1 is like a time-machine for AI researchers,” said Jen-Hsun Huang, founder and CEO of NVIDIA. “Enterprises, research centers and universities worldwide are adopting DGX-1 to ride the wave of deep learning — the technology breakthrough at the center of the AI revolution.”

Here's what Lipacis wrote this spring as he saw the new upward momentum in foundry WFE (wafer fabrication equipment) demands...

"We revise our 2023 WFE to $81bn vs. prior $75bn as we layer in spending of Analog and MCU players in our bottom-up model. We think the Street is underestimating demand for Trailing Node capacity, which we estimate will account for 46% of 2023 WFE spend. We forecast a WFE recovery in 2024 as semi company revenues snap back after shipping below consumption in 2023 to clear the channel of excess inventories. AMAT, NVMI and ONTO are our top Trailing Node plays."

WFE Demand Historically Driven By Leading Edge and Memory

Lipacis goes on to describe the industry dynamics, even in the midst of AI-GPU mania that exceeded his expectations (but not mine, where we were heavy buyers of NVDA near $120 during the October bear market nadir)...

"Historically, WFE demand was primarily driven by leading-edge logic chips like CPUs in PCs, processors used in datacenters or application processors and modems used in cellphones, led by most advanced logic and increasingly smaller and cheaper memory solutions. Consequently, ~80% of WFE spend was driven by leading edge logic and memory."

Trailing Node as a New Driver of WFE, Driven by an IoT Computing Era

Lipacis continues...

"We've argued that the industry has entered the '4th Tectonic Shift to an IoT Computing Era,' where for the first time in history, the volume computing device, IoT, requires trailing node instead of the leading-edge chips required by previous computing eras, like handsets and PCs."

The Lipacis team estimates that this IoT Computing Era is rapidly growing to 10s of billions of devices annually, which is driving demand for trailing node WFE. They estimate that trailing node CapEx will increase from 22% of WFE historically to 46% of WFE spend in 2023 and believe the Street is underestimating the importance of Trailing Node CapEx.

They also believe that increased tensions between the US and China will lead US and European-based semiconductor companies and OEMs will shift sourcing to domestic players, ultimately translating to faster revenue growth. This works for GFS as they have EU fabs too.

(end of TAZR member commentary on NOVA from early July)

Bottom line

Buy NOVA before NVDA earnings. You might thank me later.

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