Netlist Inc (OTCMKTS:NLST) Soars On Patent Approval

After a considerable period of bull runs which rocked Netlist Inc (OTCMKTS:NLST) up until September last year, the firm’s share price finally begun to rally upwards. Since then, the price has been on an upwards trajectory. This is either significant of a positive value proposition which its management has been making to investors or to the news that came to market and which has led the firm towards such positive highs.Speaking of the share price, investors have continued to enjoy considerable price spikes. NLST Daily ChartWith this in mind, it was quite clear that the news which emanated from the company over the past week acted as the catalyst to the stock’s positive performance. We, therefore, reviewed this news with the goal of establishing its short and long-term effects on the share price of the company. This piece provides a summary of the findings.

History of NLST

Let us, however, first have a brief look at the firm’s history so as to bring things into perspective.Netlist Inc was formed back in 2000 and its headquarters placed in Irvine, California. The firm is involved in the design, manufacture, and sale of modular memory systems and subsystems which are useful for high-performance computers, servers, and other communication markets globally. Over time, it has built a broad product line as can be seen on the firm’s website. Furthermore, it also acts as a reseller for Samsung products to memory circuit distributors, specifically the components for DRAM and NAND flash.Its largest market share includes original equipment manufacturers, therefore, their main marketing method is through direct sales. Their sales are similarly actualized through a network of representatives who have been grown and trained over time.

Past Developments

There are a number of issues that have rocked both NLST and the industry within which it operates. For the latter (as we will later see), the industry has been marred by significant turbulence, and this has seen the share prices of most companies operating therein to plummet. For NLST specifically, there has been a dispute which has run for quite some time regarding one of their patents.Each of these has had some impact on the operations of the firm. In the next segment, we look at these issues in detail and try to establish how they have and will continue to impact NLST going forward.

The Memory Downturn

Towards the end of 2018, the memory market hit a slump.As is known, the semiconductor industry is a cyclical industry. Therefore, during periods of downturn, the market and its players suffer greatly from reduced revenues, therefore, reduced profits. Generally speaking, the growth experienced during the period ended in December 2018 was half that of 2017 as a result of the above. As such, this slump negatively affected the share prices of most of the stocks and led to a decline in their stock prices.This was not the case for the top 25 semiconductor companies whose sales increased by 16.3% during 2018 while other companies experienced only about 3.6% in revenue growth. Samsung is the largest of these companies.The above had some impact on the price of Netlist during the mid-year period. However, it became apparently clear that the firm was going to weather the storm when its share price increased towards the end of the year as this was during a time when other firms’ prices were declining. In our view with the firm acting as a reseller for Samsung’s products, it rode on Samsung’s wave of revenue growth, therefore, the revenues to them eventually increased.

Success with the Patent

Netlist has been held up in a patent trial against Google for a while. The patent hearing request was presented to the United States Patent Trial and Appeal Board by Google. It involved the use of memory modules and the use of rank-selecting signals dubbed patent ‘912.The win came when the board denied a hearing request by Google to review its previous decision. By doing this, the board upheld Netlist’s validity to claim patent ‘912 as its own.This is particularly big for Netlist as it presents them with the ability to harness the patent’s technology to grow the server-side of their business, specifically the server memory modules at DDR5. By achieving this, Netlist expects that its technology will present the market with a much better and faster server option. This will, therefore, ensure that they achieve higher revenues in the process.In addition to this, Netlist, as well as Smart Modular Technologies, who had previously been engaged in litigations against each other, decided to drop claims against each other, saving themselves significant fees which would have been incurred in the legal battle.

Q2 Results

Net sales for the second quarter ended June 27, 2020 were $10.9 million, compared to net sales of $5.5 million for the quarter ended June 29, 2019. Gross profit for the quarter ended June 27, 2020 was $1.8 million, or 16.7% of net sales, compared to a gross profit of $0.4 million, or 7.3% of net sales, for the quarter ended June 29, 2019.As of June 27, 2020, cash, cash equivalents and restricted cash was $10.4 million, total assets were $20.6 million, working capital was $6.0 million, total debt and accrued interest, net of debt discount, was $18.2 million, and stockholders' deficit was ($8.6) million.

Conclusion

Netlist Inc has continued to grow in price despite periods of decline across the industry. Furthermore, the firm has recently won one of its largest litigations against an industry giant. The positive turn in events, strategic orientation with Samsung coupled with the benefits which winning the litigation presents them, are the reasons why we remain positive about the future of NLST.We will be updating our subscribers as soon as we know more. For the latest updates on NLST, sign up below!Disclosure: We have no position in NLST and have not been compensated for this article.