Semiconductor company Spectra7 Microsystems (TSX:SEV) is dealing with strong headwinds in its virtual reality/mixed reality business, says analyst Robert Young of Canaccord Genuity, who on Thursday dropped his recommendation from “Speculative Buy” to “Hold” and lowered his price target to C$0.20.
San Jose-based Spectra7 released its Q4 and year ended December 31, 2017, financials earlier in March, showing a 16 per cent increase in revenue over Q4/16 at $2.9 million (all figures in US dollars unless noted otherwise) and a 23 per cent increase in revenue for the year at $10.6 million.
Nevertheless, Young says that in meeting with management following the Q4 and year end release, he was concerned to hear about how the company would respond to what he saw as a strained balance sheet.
“The VR/MR market, which represents ~70% of Spectra7’s current business, has met heavier-than-expected headwinds in Q1/18. This weakens the bridge to a ramp in DCI sales, which we model starting in Q4/18,” says Young in a research update to clients. “Given these factors, we have reduced estimates, which puts added strain on the balance sheet. We now see the need for a cash infusion before the end of Q3/18.”
The analyst estimates 2018 Sales and Adj. EBITDA for SEV of $13.0 million (down from $13.7 million) and negative $7.1 million (down from $6.0 million), respectively, while for 2019, his maintains his Sales estimate at $23.6 million and lowers his Adj. EBITDA from $2.7 million to $3.5 million.
Young’s C$0.20 price target (down from C$0.50) implies a 1.4x 2019E EV/Sales and represents an 11 per cent potential return on investment as of publication date.