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.

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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.

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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.

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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.

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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.

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