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. Investing News

    Latest Labor Numbers: Good News for the Market?

    Some economic numbers are indicating that the labor market is outperforming the stock market. Should investors be bullish?
  2. Investing News

    Stocks with Big Dividend Yields: 'It's a Trap!'

    Should you seek high yielding-dividend stocks in the current investment environment?
  3. Investing News

    Should You Be Betting with Buffett Right Now?

    Following Warren Buffett's stock picks has historically been a good strategy. Is considering his biggest holdings in 2016 a good idea?
  4. Products and Investments

    Cash vs. Stocks: How to Decide Which is Best

    Is it better to keep your money in cash or is a down market a good time to buy stocks at a lower cost?
  5. Investing News

    Who Does Cheap Oil Benefit? See This Stock (DG)

    Cheap oil won't benefit most companies, but this retailer might buck that trend.
  6. Investing

    How to Ballast a Portfolio with Bonds

    If January and early February performance is any guide, there’s a new normal in financial markets today: Heightened volatility.
  7. Stock Analysis

    Performance Review: Emerging Markets Equities in 2015

    Find out why emerging markets struggled in 2015 and why a half-decade long trend of poor returns is proving optimistic growth investors wrong.
  8. Investing News

    The UAE: An Emerging Economy for Investors

    The learning from UAE on how it succeeded with timely diversification when the BRICS nations and the neighboring oil-rich economies faced challenges.
  9. Investing News

    Today's Sell-off: Are We in a Margin Liquidation?

    If we're in market liquidation, is it good news or bad news? That party depends on your timeframe.
  10. Investing News

    Bank Stocks: Time to Buy or Avoid? (WFC, JPM, C)

    Bank stocks have been pounded. Is this the right time to buy or should they be avoided?
  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 >>
Trading Center