IPG Photonics
IPGP is the leading supplier of fibre laser equipment mainly for metal processing. IPGP has 70%+ share in high power fibre lasers, and has been a pioneer in the space. Customers are OEMs and tool manufacturers
CEO is a scientist (owns 31%) and has been instrumental in improving the technology both in cost and reliability to be useful commercially.
The business has high returns and high barriers to entry. The long term secular growth opportunity in laser technology is compelling due to expanding application set and a strong value proposition versus traditional machine tools.
IPGP had spectacular revenue growth of 40% in 2017 and 2018 is showing signs that the secular tailwind remains strong, however:
We have been unable to quantify the high-power laser market in terms of unit potential. This means it is impossible to have a high level of confidence in the duration of high growth.
Operating margins are at peak, and highly unlikely to improve.
40% exposure to China is a risk in our opinion.
So far IPGP has always managed to innovate and stay far ahead of the competition, but we worry there is narrowing market demand as we move to higher and higher power lasers.
Fibre lasers have now got to ~70% of all lasers sold, so the penetration game vs CO2 is coming to an end.
Underlying market growth has historically been ~6%.
Potential Upside: $307 (+25%): Based on mid teens growth
Sensible Downside: $190 (-23%): Mildly lower margins and mean reversion to revenue growth of ~6%.
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