Is Netlist (NLST) Stock a Good Investment?

Netlist, Inc. (OTCQB: NLST) engages in the design, manufacture and sale of memory subsystems for the computing and communications markets. Its products include storage class memory, non volatile memory, embedded flash, specialty dimms and NVME SSD. The company was founded by Jayesh Bhakta, Chun Ki Hong and Christopher Lopes in June 2000 and is headquartered in Irvine, CA.

Q4 and Full Year 2022 Results

Netlist, Inc. has reported its financial results for the full year and fourth quarter of 2022. The company saw a 58% increase in full-year net product sales, amounting to $161.6 million compared to $102.4 million in 2021. Full-year product gross profit also increased by 34% to $11.9 million from $8.9 million in the previous year. CEO C.K. Hong attributes the growth to a favorable memory market in H1 2022 but anticipates weak demand in 2023, which will impact near-term performance. Netlist continues to advance its intellectual property licensing campaign, with trials in Texas and Germany.

Q4 2022 results show a decrease in net product sales to $21.7 million compared to $36.3 million in Q4 2021. Product gross profit for Q4 2022 was $1.6 million, slightly lower than the $2.0 million reported in Q4 2021.

NLST Stock Trending Today

Netlist, Inc.'s stock is trading at $4 as of 24 Apr 2023 and is up by 236% year-to-date (YTD).

On Friday, Netlist secured a $303 million patent infringement victory against Samsung Electronics Co. A Texas federal jury found Samsung guilty of willfully infringing all five patents related to data processing improvements that Netlist had accused them of violating. Following the verdict, Netlist's stock increased by 21%. The lawsuit began in 2021 when Netlist claimed Samsung's memory products used in cloud-computing servers and other data-intensive technologies infringed their patents. Samsung countered, stating the patents were invalid and that their technology functioned differently from Netlist's inventions.

Over the past year, the stock is down by 7% whilst the S&P 500 is down by 4%, meaning the stock has underperformed the market by approximately 3% over this period.

Is Netlist, Inc. a good investment? Let’s take a closer look and see what the numbers tell us.

Why Are Fundamentals Important?

‘Fundamentals’ are a set of key metrics which can help you, as an investor, assess the financial health of an organization as well as its growth prospects. Over the long term, the price of a company's stock is usually tied to its fundamentals. It makes sense then to start by analyzing these when we are considering if it has the makings of a good long-term investment.

There are a number of fundamental metrics to look at, but the ones we'll focus on are price-to-book value (P/BV), price-to-sales ratio (P/S ratio), earnings per share (EPS) and debt. When they are analyzed together, these metrics can start to 'paint the picture' and help you understand if a company is a solid investment.

With this in mind, let's take a look at Netlist, Inc.’s fundamentals and see if they can tell us anything about the company’s potential as an investment opportunity.

Netlist, Inc.'s Fundamentals

A good place to start is to look at Netlist's P/S ratio, which looks at a company's stock price compared to its sales (revenues). It is calculated as the current price divided by sales for the previous 12 months and is useful because it helps us understand how much investors are willing to pay for every dollar of a company's revenues.

The consensus opinion is that stocks with a lower P/S ratio offer better value, and stocks with a very low P/S ratio are known as 'value stocks'. However, what is considered a 'high' or 'low' P/S Ratio is relative and can vary across different sectors, so the best way to objectively assess this is to compare a company against its industry peers.

Based on its most recent financial statements, Netlist, Inc.'s P/S ratio is currently 5.7 which matches the industry benchmark.

Another key metric to look at is a company's price-to-book value (P/BV), which tells us how much investors are willing to pay for a company's assets. It is calculated by the company's stock price divided by its net assets (or 'book value', meaning the value of all assets which appear 'in its book'). P/BV is used by value investors to identify potential investments and a P/BV of 1 is usually considered a solid investment.

Netlist, Inc.'s P/BV is 34.2 according to its most recent financials, which is 580% higher than the industry benchmark of 5.

Finally, it's always worth looking at a company's debt profile before deciding to invest in order to assess the risk. A high amount of debt can be a problem if a company is not generating enough cash flow to service its debt, and some sectors rely on debt more heavily than others.

According to its most recent financial statements, Netlist, Inc. has total debt of $7.88m, and this has gone down by 17% over the past year. The company also has cash & short-term investments totalling $43.61m, giving it a 'net debt' of $-35.73m.

Based on these figures, Netlist, Inc.'s current levels of net debt don't worry us, as the company generates enough revenue to service its debt and is not using debt to fund its operations, which is good to see.

Is Netlist, Inc. a Buy?

All in all, we’ve noticed mixed trends at Netlist, Inc. On the one hand, the stock is up by 236% YTD but on the other, down by 7% over the past year.

Investing in Netlist carries risks due to the uncertainties surrounding litigation. However, the company presents an interesting investment opportunity with the potential for significant value increases if it continues to achieve legal victories. While not suitable for all investors, Netlist may be worth considering for those willing to accept the additional risk. With this in mind, we think that Netlist, Inc. is one for the watchlist.

As with any stock, however, there are additional factors to consider before making an investment decision. This analysis it general in nature and based on historical data, and it does not take into account your specific investment objectives or financial circumstances. Additionally, this article does not look at the macro environment where geopolitical headwinds, internal company changes and individual technicalities in the way a company conducts its business can have a significant impact on a company's long-term outlook. Please do your own due diligence before deciding to invest.

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