NVE Corporation (NVEC)

Technology companies often face the prospect of years of negative cash flow while developing new ideas while hoping that one of these epiphanies will carry the company to profitability. Not so with NVE Corporation (NVEC). The company has had a longstanding agreement with the government to do contract research and development. This means the company gets paid for the R&D it performs while at the same time, most of the intellectual property it discovers along the way still belongs to the company.

Spintronics is short for Spin Electronics, and depicts what Craig Hallum has termed a "profound advance in microelectronic technology." The technology uses the electron spin instead of the electron charge to acquire, store or transmit data. Obviously with my financial background I can't dive deep into the ramifications of this technology, but suffice it to say the company is on the verge of revolutionary discoveries that could drastically impact electronics in the future.

Although most of the contract R&D was done for military purposes, the company has introduced its first products in the medical device area. Specifically, NVE has begun selling revolutionary technology relating to hearing aids and pacemakers. As applications from research begin hitting the market, NVE has seen its revenue stream shift from being heavy in government contracts to now being much more driven by sales of products. The expectation is that the company will soon enter the automotive and consumer electronic businesses.

NVE has done a good job of validating their technology by lining up some strong blue chip customers. Companies such as Honeywell, Cypress Semi and Motorola have come on board which strengthens the technology's credibility. One concern when bringing in partners is the protection of the intellectual property. NVE has more than 100 patents worldwide to cover its technology but there still arise questions as to how these patents cover specific uses of the technology.

The company is currently involved in litigation with Motorola as well as Freescale Semiconductor but it looks likely that negotiations will allow the relationship to remain and NVE to be paid a license fee for its technology. In fact, licensing is likely to be a significant revenue driver in the future as more companies want to implement spintronics into their products. International revenue is picking up as well allowing NVE to diversify its revenue base and take advantage of the strong global economy.

I am a bit concerned that the stock is expensive, but it is very unclear how quickly the company will grow its business. There is a strong possibility that sales will ramp as more applications come online. There is a significant amount of short selling in the stock which could provide buying pressure should any unexpected positive announcements happen. The prospects look good and I would look for a good low risk spot to become involved with this name.

FD: Author does not have a position in NVEC