High-performance solid-state drive (SSD) and modular memory subsystems manufacturer Netlist, Inc. (NLST) has been gaining momentum over the past year, despite the ongoing semiconductor shortage. The stock has gained 562.5% over the past year, and 724.3% year-to-date, outperforming its peers by a huge margin. The broader iShares Semiconductor ETF (SOXX) has gained 61.9% over the past year, and 18.6% year-to-date. Shares of NLST have gained 141.3% over the past month, significantly outperforming SOXX’s 2.9% returns.

NLST is a hot meme stock, with nearly 17,500 retail investors discussing the stock on investing community platform Stocktwits. There have been frequent conversations about NLST on Reddit forums as well. Retail investors expect NLST to receive a settlement from Google’s parent Alphabet, Inc. (GOOGL) from patent dispute concerns. However, no concrete evidence pointing toward such settlement is available at the moment.

Here’s what could shape NLST’s performance in the near term:

Previous Patent Infringement Claims

NLST recently won a $40 million settlement from a patent infringement lawsuit filed against SK Hynix, regarding alleged misuse of NLST’s LRDIMM and RDIMM patents by the latter. NLST is also authorized to purchase up to $600 million worth SK Hynix’s memory products.

NLST also entered into a patent cross license agreement with SK Hynix Inc. on April 5, which gives SKY Hynix access to NLST’s portfolio of U.S. and foreign patents. In exchange, NLST is entitled to stipulated royalty, as well as access to SK Hynix’s memory and storage products and cross license to SK Hynix’s patent portfolio.

Retail investors are betting on a similar patent claim settlement from GOOGL in the near term.

Bleak Financials

NLST’s revenues came in at $14.90 million in the fiscal first quarter that ended April 3, reflecting marginal gains year-over-year. However, gross profit declined 28.8% from the same period last year to $1.50 million. Its operating loss increased 178% from the prior-year quarter to $3.87 million. This can be attributed to a 265.9% rise in intellectual property legal fees. Net loss came in at $4.02 million, up 160.5% from the year-ago value. Loss per share doubled year-over-year to $0.02.

The company revenues increased 30% sequentially in the last reported quarter. However, its net loss and loss per share increased 127.1% and 100%, respectively, from the prior quarter values.

Moreover, NLST’s trailing-12-month gross profit margin of 12.89% is 73.5% lower than the industry average of 48.6%. Its net income margin, ROA and ROTC are negative.

Weak Balance Sheet

NLST’s total debt-to-equity ratio is 308.85%, reflecting a substantial debt burden. However, the company is bleeding cash from operations, as evident from its negative trailing-12-month net operating and levered free cash flows of $8.05 million and $5.97 million, respectively. These raise concerns regarding NLST’s capacity to repay its debt obligations. Moreover, the company’s debt/free cash flow ratio is negative 0.78.

Consensus Rating and Price Target Reflect Potential Downside

Of the two Wall Street analysts that rated NLST, one rated it Buy while the other rated it Hold. The 12-month median price target of $4.25 indicates a 14.5% potential downside from its last closing price of $4.97. The price targets range from a low of $2.50 to a high of $6.00.

Stretched Valuation

In terms of non-GAAP forward P/E, NLST is currently trading at 47.33x, 77% higher than the industry average of 26.74x. The stock’s non-GAAP forward PEG multiple of 3.16 is 69.4% higher than the industry average of 1.86.

Moreover, NLST’s forward Price/Sales and Price/Book ratios of 9.46 and 33.13 are significantly higher than the industry averages of 4.06 and 6.22, respectively.

POWR Ratings Reflect Bleak Prospects

NLST has an overall grade of D, which equates to a Sell rating in our proprietary POWR Ratings system. The POWR Ratings are calculated considering 118 different factors, with each factor weighted to an optimal degree.

NLST has a grade of F for Value, and D for Quality. The stock’s higher valuation ratios compared to its peers account for the Value grade. NLST’s negative profit margin, on the other hand, justifies the Quality grade.

Of the 99 stocks in the Semiconductor & Wireless Chip industry, NLST is ranked #91.

In addition to the grades highlighted, you can view NLST Ratings for Growth, Stability, Sentiment, and Momentum here.

Click here to view the top-rated stocks in the Semiconductor & Wireless Chip industry.

Click here to check out our Semiconductor Industry Report for 2021

Bottom Line

While retail investors are speculating on a probable settlement valued at billions from GOOGL, there is no official information yet. Furthermore, the company’s short-term growth prospects are likely to be affected by the industry headwinds such as the global chip shortage and rising production expenses. Analysts expect NLST’s EPS to remain negative in the ongoing quarter (ending September 2021) and next year. Thus, the stock is best avoided for now.

NSLT shares were trading at $433.76 per share on Wednesday afternoon, up $0.83 (+0.19%). Year-to-date, NSLT has gained 16.78%, versus a % rise in the benchmark S&P 500 index during the same period.

About the Author: Aditi Ganguly

Aditi is an experienced content developer and financial writer who is passionate about helping investors understand the do’s and don'ts of investing. She has a keen interest in the stock market and has a fundamental approach when analyzing equities. More...

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