Raymond James Pinpoints Margin Improvement, Profitability In nLight Upgrade

Shares of laser company nLight, Inc. LASR have experienced a 40-percent slide since their June peak. This drop overstates market pricing dynamics, underappreciate's the company's net share gain and demonstrates a pessimistic take on the rate of margin expansion, in Raymond James' view. 

The Analysts

Analyst Brian Gesuale upgraded nLight from Outperform to Strong Buy and maintained a $40 price target.

The Thesis

Despite a benign pricing environment in 2017, price declines have quickly increased, Gesuale said in the upgrade note. (See his track record here.) 

“We believe that price downs will be in the vicinity of 11-15 percent this year compared to the 20-30 percent knockdowns that some have been speculating.”

New products and customers are likely to boost nLight's market share, the analyst said. Since nLight’s first fiber laser in 2014, the company has developed a product breadth and differentiation that should usher nLight into a growing market segment, he said. 

“The broader line of power and its new Corona product should also enable more rapid penetration into Tier 1 suppliers, which could also add several hundred million of addressable market — $400 million — that has previously been unapproachable to nLight. Hans was the first of what could be many Tier 1 to hit nLIGHT’s wheelhouse.”

While Gesuale anticipates gross margin improvement as a key driver for investors, the trajectory through 2019 could prove conservative due to the company’s recent gross margins and cost-cutting, he said.

“While pricing could put pressure on the rate of margin expansion, its hard to conceive that a meaningful cost out, new product in 2019, and some greater inroads into high power wouldn’t offset a competitive pricing environment.”

Price Action

Shares of nLight were up 5.57 percent at $25.95 at the time of publication Friday. 

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