Rubicon Technology, Inc.: From Russia, with sapphires
Silicon may be the compound that made electronics famous, but the rising star on the scene is sapphire and Rubicon Technology, Inc. (Nasdaq: RBCN) is the new leading light. Founded in 2000 and public only since Nov. 20, this Franklin Park, Ill.-based small cap is in the interesting business of growing sapphires for electronic and electro-optical circuits.
Sapphire has some great qualities that can be used in conjunction with silicon circuitry. A pure sapphire is crystal clear, made from aluminum oxide. It can be grown and cut into wafers, much the way silicon wafers are made, and has different chemical, electrical and physical properties when cut in different orientations. In different configurations, the wafers are used to make light-emitting diodes (LEDs), radio-frequency integrated circuits (RFICs) and blue laser diodes. Silicon circuitry can be laid on top of sapphire wafers (silicon-on-sapphire, or SOS) for electro-optical chips.
The Russian government began developing techniques years ago for growing sapphire crystals to use in military and aerospace applications. Rubicon, whose chief scientist is Russian, has refined those techniques into a proprietary process that allows it to create the largest and purest sapphire wafers on the market.
Rubicon can make crystals with fewer than 100 defects per square centimeter, compared to defect rates of 5,000 to 100,000 defects per centimeter with other manufacturing methods. It is the only manufacturer that can reliably make six-inch diameter wafers, while others are still stuck at two inches and four inches, and is expected to start producing eight-inch wafers within 18 months. Just as in silicon wafers, the larger sizes sell at higher margins but reduce the final chip costs dramatically.
A Dec. 26, 2007, report by CIBC World Markets notes that its technology “is extremely difficult to duplicate,” while a Jan. 7, 2008, report by UBS Investment Research says Rubicon has “a 12- to 18-month time-to-market advantage over its competitors in making six-inch and eight-inch wafers.”
That makes Rubicon a very popular supplier of sapphires. CIBC rates Rubicon as the top supplier to the LED market, a business growing at 30% to 40% annually, driven by LEDs used in notebook computer, cell phone and flat panel displays. CIBC estimates that the high brightness, or HB LED market, will grow to $10 billion in 2011 from $4 billion in 2006. And the use of LEDs to replace ordinary light bulbs is a bright light on the horizon, driven by the demand to cut energy costs. UBS projects that lighting for laptops, cars, signage, traffic lights and indoor lights could account for over half of the LED market by 2012. U.S. Energy policy is encouraging the move to LED lighting.
CIBC also projects 70% growth in the SOS market, driven by new applications such as the transceiver chips in Apple’s iPhone. Rubicon’s sapphire crystals are even used in rocket, submarine and helicopter windows and in surgical blades, because the sapphire’s hardness is second only to that of diamonds.
Both investment banks estimate that Rubicon’s revenues grew to $34 million in 2007, up from $21 million in 2006, with a $3 million profit, compared to a $6 million loss in 2006. UBS projects net income of $8 million on $48 million revenue in 2008.
The stock has already been bid up, but still has room to grow. The IPO price was $14, but the stock immediately shot past $18, reached a peak of $25.75 in late December, but has retreated in the current market downturn to $21.35 at Wednesday’s close. Three analysts cover the company, all with buy recommendations and price targets ranging from $24 to $29. Its market cap is about $411 million.
RBCN is trading at about 8.6 times estimated 2008 revenues. Its peers, according to CIBC, are trading at anywhere from 2.2 times, for ATMI, Inc. (Nasdaq: ATMI), to 23 times, for Universal Display Corp. (Nasdaq: PANL), estimated 2008 revenues. The average multiple among CIBC’s comparables is 9 times 2008 revenues. PANL, which CIBC estimates will have 2008 revenues of $25 million, is the only competitor of comparable size (ATMI, the next smallest, comes in at $410 million revenues.)
UBS, with the most aggressive target price at $29, believes that Rubicon deserves to trade at a premium to its peers given its advanced technology and leadership position in one of the fastest-growing segments of the market, LEDs. In early January, Rubicon was trading at 35 times estimated 2009 EPS, about twice that of its peers.
Rubicon has about $75 million in cash and generated about $2 million in cash from operations in the third quarter last year, but will probably use some cash to expand manufacturing capability. Accounts receivable are holding steady at about $4 million a quarter.
There are a few unusual caveats for Rubicon. It has filed for only three patents, none of them for its products or technology, relying on trade secrets to protect its intellectual property, which is highly unusual in a patent-saturated industry. Also, three major customers accounted for 59% of its sales in the first three quarters of 2007. Finally, there is always the possibility of an even newer technology hitting the market. One fledgling competing technology, gallium nitride wafers, could also prove useful for LED manufacturing, and a Japanese company is experimenting with creating a blue LED from standard silicon wafers.
So far, though, Rubicon (RBCN) is the clear technology leader in a market with huge potential. That makes it one gem of a stock.
