One of the best technology sectors right now has nothing to do with Apple (NASDAQ:AAPL), Google (NASDAQ:GOOGL), or Facebook (NASDAQ:FB). It’s in the area of photonics. In simplest terms, photonics is the science of light.
I want you to think about it for a moment – think about how, since almost the birth of humankind, light and optics have been there. From primitive people’s fires to whale oil lamps to the electric light bulb to lasers – humankind’s progression has been marked by advancements in the harnessing of light.
Fleshing out the definition a bit, photonics is the technology of generating and harnessing light and other forms of radiant energy whose unit is the photon. Photonics involves cutting edge uses of lasers, optics, fiber optics, and electro-optical devices in a wide range of applications.
Photonics has taken its place alongside electronics as a critical and rapidly growing technology of the 21stcentury. The global photonics market is forecast to be a $720 billion market by 2020, growing at a compound annual growth rate of 35%.
Welcome to the Photonics Century
Photonics-based applications are today used in a wide range of industries from industrial automation to medical diagnostics to scientific research.
Lasers in particular are displacing conventional technologies because they can do many jobs faster, better and more economically. Finding ways to make products more efficiently is an absolute must for today’s manufacturers. That’s why I strongly believe photonics and lasers are a must own sector for you and all my other readers.
One sector where photonics has become crucial is communications. Coherent light beams (lasers) have a high bandwidth and can carry far more information than radio or microwave frequencies. Fiber optics allow light carrying data to be piped through cables, replacing old copper cables: an absolute necessity in today’s world of big data, cloud computing and video streaming.
Another way photonics has entered our everyday lives is solid state lighting. Light-emitting diodes (LEDs) are a high performance, low-cost, green alternative to incandescent light bulbs.
Then there is LiDAR (laser radar systems), which is used in the aerospace industry and is crucial for the future success of autonomous vehicles, those self-driving cars that are frequently in the news these days.
Photonics technology has become ubiquitous.
Photonics has also become a key component in many manufacturing processes. Think laser welding, drilling and cutting as well as all the precision measurements needed by manufacturers that is provided by lasers.
Lasers Evolution
That leads directly to my recommendation – IPG Photonics Corporation (NASDAQ:IPGP), a leading developer and manufacturer of high-performance fiber & diode lasers and amplifiers for a vast range of industries and applications. Its products are used in industries such as materials processing, communications, medical and biotechnology, science and entertainment. IPG Photonics has been in my Growth Stock Advisor portfolio since late last summer and it’s up 44% for us and has a wide path in front of it.
The evolution of lasers in manufacturing is a journey of over half a century. Its ready adoption by manufacturers is largely due to the fact that lasers convert common sources of energy into concentrated, directed beams of energy. To do this, a laser must have an energy source, a way of coupling that energy into the laser cavity, and a method of delivering the resulting laser beam to the workpiece.
The new fiber lasers developed by IPG are vastly superior to the old legacy industrial lasers in every facet of the process:
- Energy Source: Instead of using energy sources like lamps or even chemical reactions, fiber lasers use long-lived semiconductor diode lasers that efficiently convert electricity into light. Not only is the energy conversion efficiency raised, but frequent servicing and sometimes environmentally-unfriendly consumables are eliminated.
- Energy Coupling: Conventional laser optical cavities have bulky air or gas-filled spaces. Large cavities are necessary due to the inefficiency of gas lasing or the need to insert bulk optical elements within the cavity. Fiber lasers are very compact because they convert semiconductor diode energy into useful laser beams within a fiber no thicker than a human hair.
- Laser Beam Delivery: Legacy lasers utilize complex optics to extract the laser beam and deliver it to the workpiece. External steering optics are often needed to deflect the laser output onto its target. In contrast, flexible optical fiber provides a built-in, ideal beam delivery system.
- Mass Production Possible: Both key fiber laser elements – semiconductor diodes and optical fiber – can easily be mass produced. Quite a contrast from legacy lasers with their bulky hermetic laser cavities, their need for precision optical alignments and ultra-flat optical surfaces.
The change is, as the company says, akin to the replacement of vacuum tubes by transistors.
IPG offers, I believe, the best-in-class laser-based systems for high-precision welding, cutting, marking, drilling, cladding, and other processing of metal, ceramic, semiconductor and thin films for customers in automotive, aerospace, railway, energy, electronics, consumer and other industries.
Its range of laser products includes ytterbium, erbium, thulium as well as Raman and hybrid fiber-crystal lasers. All wattage ranges are there too: low (1 to 99 watts), medium (100 to 999 watts) and high (1,000+ watts) output power lasers in wavelengths from 0.3 to 4.5 microns. The lasers can be continuous wave (CW), quasi-continuous wave (QCW) or pulsed. The pulsed lasers are available in nanosecond, picosecond and femtosecond ranges.
Among the well-known companies using IPG products are: Boeing (NYSE:BA), Lockheed Martin (NYSE:LMT), KLA-Tencor (NASDAQ:KLAC), Toyota Motor Corporation ADR (NYSE:TM), BMW (DE:BMWG) and Mitsubishi Electric Corp ADR (OTC:MIELY).
Additionally, the company recently purchased Innovative Laser Technologies (ILT). This firm has a proven track record producing leading-edge systems for medical device manufacturers, one of the fastest growing markets for fine welding and cutting applications. This will greatly aid IPG in its effort to penetrate the market for medical device applications.
Last May, IPG bought Menara Networks, which is an innovator in optical transmission modules and systems. This allows IPG to offer more integrated solutions for the telecommunications industry. In the first quarter of 2017, sales of its telecom products soared by 221% thanks to Menara.
IPG Growing Rapidly
Although both North American and European sales grew 20% in the quarter year-over-year fully 64% of IPG Photonics revenues come from the Asia-Pacific region, with another 25% coming from Europe, including Russia. Only 10.5% of its revenues come from North America.
China continues to be a driver of growth with year over year sales growth of 47% for the region and representing nearly 44% of total sales for the firm.
IPG Photonics Corporation reported Q4 2017 adjusted earnings of $1.86 per share beating the top end of estimates by $0.06. The figure was better than the guided range of $1.55-$1.80.
Management expects sales to come in a range of $330 to $355 million for the first quarter. Earnings are estimated for $1.62 to $1.87.
IPG’s Laser-Bright Future
Thanks to innovative product portfolio – last summer IPG unveiled the first 120 kilowatt industrial fiber laser – and large patent portfolio, I expect IPG Photonics to continue to outpace the other companies in the laser systems and components sector.
Another huge advantage over the competition is its vertically integrated business model, which allows it to control each and every part of its business from research and development to sales to after sales service. In this type of business, I want the company to continue to innovate.
So a purchase like that of OptiGrate, which help IPG develop new ultra-fast pulsed lasers, is what I want to see. I like the fact that IPG is moving into new end markets connected to 3D printing, defense electronics and micro-materials processing in addition to the aforementioned communications and medical sectors. This will only add to the momentum from trends such as the miniaturization of electronics and the move of the global auto industry toward the widespread adoption of fiber lasers.
Disclosure: You are responsible for your own investment decisions. All information contained in my articles is made available solely for general information purposes and should be independently verified with the companies mentioned. You should always conduct your own research and due diligence and consider obtaining professional advice before making any investment decision. I focus on bringing undervalued and under-covered high growth stocks to self-directed investors. Technology has always held a special place in my portfolio and it’s a good sector to review some of my latest research in my latest report, “Top 10 Tech Stocks to Own in 2018.”