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Written by SmallCapPower.com

POET Technologies Inc. (POETF) acquired DenseLight and BB Photonics last year giving it the technology to address 100G optical telecom, the largest and fastest growing market segment so, going forward, we believe that POET Technologies is in an ideal position to become profitable at the EBITDA level by the second half of 2018.

Investment Thesis

• POET Technologies enables the performance of light at the cost of copper
• Significant opportunity for 100G connectivity
• Vast assortment of IP in technology represented by 58 granted patents and 12 pending
• Strong balance sheet with high cash reserves

POET enables the performance of light at the cost of copper

Using light to replace copper interconnects substantially reduces energy consumption. Traditional optical solutions have not been cost effective due to the use of multiple individual components. POET integrates electronics and optics on a single chip, significantly improving data center links. POET has developed a revolutionary technology that integrates the optical communications module – optical and electronic components – on a single chip. The complete monolithic integration by POET provides up to an order of magnitude reduction in total power consumption and cost. The attributes of speed, cost, size, and power of the innovative POET platform provides POET Technologies with competitive advantages over other competitors.

Significant opportunity for 100G connectivity

Given that 100G connectivity continues as the largest, fastest growth aspect of optical telecom, POET Technologies should be able to position itself for future growth. There is an attractive market opportunity with 45% CAGR in wide area networks and 15% CAGR in use of 100G in datacenters.

Source: Light Counting via POET Technologies, July 2017

Vast assortment of IP in technology represented by 58 granted patents and 12 pending

POET Technologies has 58 issued patents and 12 patents pending related to the semiconductor Planar Opto-Electronic Technology (“POET”). These patents provide a significant barrier to entry against competition, along with trade secrets and know-how acquired from DenseLight and BB Photonics. The POET platform, along with technology acquired from BB Photonics, should enable applications in adjacent markets over the long term, including industrial and consumer products.

Strong balance sheet, with high cash reserves

POET has a strong balance sheet with ~US$15.5 million supporting multiple quarters of development. During the year ended December 31, 2016, POET Technologies generated revenues of US$1.9 million and gross margin of 26%. The Company currently operates at a loss. 100% of the Company’s revenue was generated over a seven and half month period by its subsidiary DenseLight Semiconductor, which it acquired on May 11, 2016. Going forward, the acquisition of DenseLight will provide strong planned year-on-year growth, and will lead it on the path to EBITDA profitability in 2018 (with 50% gross margin).

Financial analysis

During Q2 2017, POET Technologies reported revenue of US$648,382 through its DenseLight subsidiary compared to US$576,741 in Q2 2016. Revenue in Q2 2016 included US$110,533 of service revenue as compared to nil in Q2 2017. On a comparative basis, product revenue, therefore, increased by 39% over Q2 2016.

Cost of sales was US$320,857 in Q2 2017, which resulted in a gross margin of 51%, compared to a cost of sales of US$280,563 and gross margin of 51% in Q2 2016.

Valuation and outlook

POET Technologies currently generates limited revenues and has reported losses at the operation and net level. Although the Company trades at a high price-to-sales multiple of 20.97x, given its low TTM revenues of US$2.6 million the multiple should come down going forward as the DenseLight acquisition will enable the product sales distribution channels and also help POET Technologies to become profitable on EBITDA level by the second half of 2018.