Fiber laser manufacturer IPG Photonics (NASDAQ:IPGP) reported results ahead of analyst expectations in the Q1 FY2023 quarter, with revenue down 6.16% year on year to $347.2 million. However, guidance for the next quarter was less impressive, coming in at $340 million at the midpoint, being 4.26% below analyst estimates although EPS guidance was slightly better. IPG Photonics made a GAAP profit of $60.1 million, down on its profit of $69.6 million, in the same quarter last year.

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"We were pleased with our continued strong results in welding, which were driven by record sales into EV battery applications and all-time high sales for LightWELD, our handheld welder," said Dr. Eugene Scherbakov, IPG Photonics' Chief Executive Officer

Both a designer and manufacturer of most of its products, IPG Photonics (NASDAQ:IPGP) is a provider of high-performance fiber lasers that are used for cutting, welding and processing raw materials.

The semiconductor industry is driven by demand for advanced electronic products like smartphones, PCs, servers and data storage. The growth of data and technologies like artificial intelligence, 5G networks and smart cars are also creating a next wave of growth for the industry. To keep up with ever changing customer needs requires new tools that can design, fabricate and test at ever smaller sizes and more complex architectures, and that is driving the demand for semiconductor capital manufacturing equipment.

Sales Growth

IPG Photonics's revenue growth over the last three years has been unimpressive, averaging 5.44% annually. Last year the quarterly revenue declined from $370 million to $347.2 million. Semiconductors are a cyclical industry and long-term investors should be prepared for periods of high growth, followed by periods of revenue contractions (which can sometimes offer opportune times to buy).

Despite IPG Photonics revenues beating analyst estimates, this was still a slow quarter with a 6.16% revenue decline.

IPG Photonics' appears to be headed for an upturn. While the company is guiding to revenue declines of 9.82% year on year next quarter, analyst consensus sees 4.58% growth over the next twelve months.

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Product Demand & Outstanding Inventory

Days Inventory Outstanding (DIO) are an important metric for chipmakers, as it reflects the capital intensity of the business and the cyclical nature of semiconductor supply and demand. In a tight supply environment, inventories tend to be stable, allowing chipmakers to exert pricing power. Steadily increasing DIO can be a warning sign that demand is weak, and if inventories continue to rise the company may have to downsize production.

This quarter, IPG Photonics’s inventory days came in at 230, 19 days above the five year average, suggesting that that inventory has grown to higher levels than what we used to see in the past.

Key Takeaways from IPG Photonics's Q1 Results

With a market capitalization of $5.58 billion IPG Photonics is among smaller companies, but its more than $1.07 billion in cash and positive free cash flow over the last twelve months put it in a very strong position to invest in growth.

We liked to see that IPG Photonics beat analysts’ revenue expectations pretty strongly this quarter. That feature of these results really stood out as a positive. On the other hand, it was less good to see that the revenue growth was quite weak and the revenue guidance for the next quarter missed analysts' expectations although EPS guidance was slightly better. Overall, it seems to us that this was a complicated quarter for IPG Photonics. The company is up 3.35% on the results and currently trades at $121.97 per share.

IPG Photonics may have had a tough quarter, but does that actually create an opportunity to invest right now? It is important that you take into account its valuation and business qualities, as well as what happened in the latest quarter. We look at that in our actionable report which you can read here, it's free.

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The author has no position in any of the stocks mentioned.