The Holy Grail in photonics is cost reduction (through efficiencies in process and materials) combined with lower power consumption. Throw in a smaller size, and higher performance, and customers should beat a path to your door. POET (OTC:POETF) (TSX:PTK.V) believes it can provide all four with its proprietary “optical interposer” based on a novel low-loss material that can allow multiple components to be integrated into a single package entirely at wafer-scale. What this means is that it can eliminate steps in the labor-intensive assembly process currently used when manufacturing optical transceivers. Manual assembly results in higher scrap rates, longer production times, and higher equipment costs. Also, its base material is far better suited to use in the management of light than silicon due to its lower loss and planar architecture, thus allowing lower powered lasers, resulting in lower power consumption and the ability to use less expensive lasers. POET hopes to disrupt the current market for photonics devices and have its Optical Engine platform become the standard in the industry.
POET recently announced a Letter of Intent (LOI) to establish a $50 million joint venture with Xiamen Sanan Integrated Circuit Co. Ltd. of Xiamen, China. POET will be contributing know how and a license to some of its technology, and Xiamen will contribute intellectual property, capital and production facilities. It will ultimately be 53% owned by Sanan IC and 47% by POET. Its first products will be optical engines (POET’s interposer combined with Sanan’s lasers) to be sold to manufacturers of 100G, 200G, and 400G devices for use in data centers and telecommunications. The venture hopes to convince incumbent or new module suppliers to adopt its lower cost Optical Engine, which can be sold at prices below the costs of the legacy component suppliers. This joint venture could generate as much as $200-$300 million in revenues per year by 2025 by taking modest market share.
POET reinvented itself by selling its foundry in Singapore and redeploying the cash to pursue the development of products with higher return on equity due to demand, market growth, and low capital requirements. It is capitalizing on management’s expertise in processes, lasers and design to target a number of industry segments in the photonics market with the highest return, with the first two being 100G and 400G for data centers, and supercomputers for use with Artificial Intelligence.
POET has presented NRE proposals to numerous companies targeting a variety of markets and we await news on at least three agreements in 2020. We expect the company to generate a few million dollars in revenues from these proposals.
We expect that POET will start producing samples for customers late this year and early next and should be ready to ramp into production starting at the end of 2021. The POET-owned equipment on which the optical interposers are made reside at a Malaysian foundry. That equipment, and the process recipes, are solely for its use in order to protect its trade secrets. The capacity of that equipment set should be sufficient to provide initial production quantities; the company can add equipment as needed in this location to expand volumes. Completed optical interposers will be shipped to the JV for assembly, testing, and sale to transceiver manufacturers and others.
The stock currently trades at a fully diluted enterprise value of $130 million. The global market for optical transceivers is estimated to be $5.7 billion in 2020 and projected to reach a value of $9.2 billion by 2025, representing a CAGR of 10.0%, according to MarketsandMarkets Research Private Ltd. POET’s product is a component of an optical transceiver and market is about a third of the transceiver market. If POET can secure even a small portion of that market with its unique offering, its valuation should far exceed its current price. We believe the stock could be worth $4.70 by 2024 based on $200 million in revenues in 2025 at 7.8xs EV to Sales, in line with its peers.
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