Investors could be forgiven for taking a quick look at CVD Equipment (Nasdaq:CVV), seeing that it's involved in chemical vapor deposition (CVD) equipment, and just concluding that it's another semiconductor equipment company. What makes this an interesting company, though, is that it's taking well-understood technology that has indeed long been central to semiconductor manufacturing and is looking to apply it to a host of new industries and products.

Investopedia Broker Guides: Enhance your trading with the tools from today's top online brokers.

Makes Sense on a Fundamental Level
When you think about what CVD is, it makes sense that CVD Equipment is looking to develop customized CVD equipment that can take the approach beyond its traditional applications in semiconductors. After all, at the most basic level CVD is about applying very thin layers of materials to a surface in a very precise and controlled fashion.

It's not surprising, then, that this technology is thought to hold a lot of promise in thin-film solar cells, med-tech (including coatings that change the performance characteristics of implants), LEDs and other advanced materials.

SEE: Earning Forecasts: A Primer

Well-Known Names on the Customer List
Although CVD Equipment has a couple of years of positive free cash flow under its belt and has been showing steady progress in growing revenue in recent years, this is still largely a developmental company. To that end, then, it's encouraging to see that companies like General Electric (NYSE:GE), IBM (NYSE:IBM) and Intel (Nasdaq:INTC), and organizations like NASA have appeared on its customer roster.

What CVD Equipment really offers at this point is customized CVD equipment and tools that are based on pre-existing standard designs. In other words, CVD Equipment tweaks and modifies, but does not have to reinvent the wheel for every customer. Not only does that reduce costs, but it also lends more predictability and consistency to the end-product.

SEE: 5 Must-Have Metrics For Value Investors

What Kind of Growth Can CVD Equipment Target?
The good and bad with a story like CVD Equipment is that it's possible to imagine huge markets just waiting for a new mousetrap to help push them towards viability. Unfortunately, it's never quite that easy. Cree (Nasdaq:CREE) is still trying to find a sustainable and predictable footing in LED, and Applied Materials' (Nasdaq:AMAT) efforts to bring new technologies (including CVD) to flat-panel, solar and LED production have not gone to plan so far.

That said, the market for thin-film solar panels could be worth $150 million to $200 million in equipment and tools for a company like CVD Equipment. Other markets like med-tech and nano-materials are likely much smaller in dollar terms today (tens of millions), but could grow significantly and sustainably over time if the technology proves itself as both efficiency-enhancing and cost-effective.

SEE: A Primer On Investing In The Tech Industry

The Bottom Line
As is often the case in these stories, valuing CVD Equipment is no easy exercise. Current multiples look rich already, but bulls will argue that CVD Equipment has only scratched the surface of its potential markets.

Let's say that CVD Equipment can grow its free cash flow at a compound rate of 15% over the next decade. If it can do that and produce a free cash flow margin on par with Applied Materials' historical rate, that suggests only $117 million in revenue in 2022 - about 1% of Applied Materials' current annual revenue run-rate, and only about 12% of nanoscale imaging specialist FEI's (Nasdaq:FEIC) trailing revenue. Even with a robust 12% discount rate, CVD Equipment would be more than 30% undervalued today on that sort of growth assumption.

Clearly this is not a stock for conservative investors, but there's a long history of corporate success stories out there that were built in large part by taking technology developed in one industry and porting it over to a much wider potential market. There are no guarantees that CVD Equipment will become one of them, but it's at least worth a look from aggressive investors.

Use the Investopedia Stock Simulator to trade the stocks mentioned in this stock analysis, risk free!

At the time of writing, Stephen D. Simpson did not own shares in any of the companies mentioned in this article.

Related Articles
  1. Options & Futures

    Cyclical Versus Non-Cyclical Stocks

    Investing during an economic downturn simply means changing your focus. Discover the benefits of defensive stocks.
  2. Investing Basics

    How to Deduct Your Stock Losses

    Held onto a stock for too long? Selling at a loss is never ideal, but it is possible to minimize the damage. Here's how.
  3. Economics

    Is Wall Street Living in Denial?

    Will remaining calm and staying long present significant risks to your investment health?
  4. Stock Analysis

    When Will Dick's Sporting Goods Bounce Back? (DKS)

    Is DKS a bargain here?
  5. Investing News

    How AT&T Evolved into a Mobile Phone Giant

    A third of Americans use an AT&T mobile phone. How did it evolve from a state-sponsored monopoly, though antitrust and a technological revolution?
  6. Stock Analysis

    Home Depot: Can its Shares Continue Climbing?

    Home Depot has outperformed the market by a wide margin in the last 12 months. Is this sustainable?
  7. Stock Analysis

    Yelp: Can it Regain its Losses in 2016? (YELP)

    Yelp investors have had reason to be happy recently. Will the good spirits last?
  8. Stock Analysis

    Is Walmart's Rally Sustainable? (WMT)

    Walmart is enjoying a short-term rally. Is it sustainable? Is Amazon still a better bet?
  9. Stock Analysis

    GoPro's Stock: Can it Fall Much Further? (GPRO)

    As a company that primarily sells discretionary products, GoPro and its potential falls right in line with consumer trends. Is that good or bad?
  10. Stock Analysis

    Are the Brands Millennials Love a Good Buy?

    Millennials make up a very big — and thus important —c onsumer generation. So if they love a brand, its stock is likely to outperform, right?
  1. How do dividends affect retained earnings?

    When a company issues a cash dividend to its shareholders, the retained earnings listed on the balance sheet are reduced ... Read Full Answer >>
  2. What is the difference between called-up share capital and paid-up share capital?

    The difference between called-up share capital and paid-up share capital is investors have already paid in full for paid-up ... Read Full Answer >>
  3. Why would a corporation issue convertible bonds?

    A convertible bond represents a hybrid security that has bond and equity features; this type of bond allows the conversion ... Read Full Answer >>
  4. How does additional paid in capital affect retained earnings?

    Both additional paid-in capital and retained earnings are entries under the shareholders' equity section of a company's balance ... Read Full Answer >>
  5. What types of capital are not considered share capital?

    The money a business uses to fund operations or growth is called capital, and there are a number of capital sources available. ... Read Full Answer >>
  6. What is the difference between issued share capital and subscribed share capital?

    The difference between subscribed share capital and issued share capital is the former relates to the amount of stock for ... Read Full Answer >>

You May Also Like

Trading Center