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Live by the Boom, Die the Boom

Emcore was skewered this week by a blog post highlighting the questionable nature of some of it’s solar contracts, and the skittish solar money ran for the exits.

Emcore is a company we used as a hedge in 2006 as we expected it to face tough tough sledding due to it’s dependency on 10GbE LX-4 optical transceiver revenue at Cisco. In 2007, everything went upside-down as investors took notice of it’s aerospace solar business, re-classified it as a Solar Stock, and ruined whatever correlation it had with the optics business. The price of the stock became de-coupled from conventional metrics, as all companies involved in perceived booming industries do.

The optical industry, including Emcore, experienced the same thing between 1998-2000. As many of us learned then: If you live by the boom you die by the boom, because the convictions of investors that participate in such events are weak. These convictions are based mostly on what others think and do, rather than what they themselves believe to be true. And these convictions can turn rapidly when investors sense the crowd is surging for the exits.

A recent post at Citron Research highlighting perceived issues with the integrity of Emcore’s solar backlog was all it took to shake the convictions of those who decided they wanted to be solar investors. The issues raised by Citron were not earth shaking and from our perspective relied on little ‘unseen’ information. Investors and analysts who follow the solar business should have been aware of these issues; perhaps they were and had legitimate reasons to dismiss them. Perhaps some of Citron’s data is flawed. Regardless, the herd surged for the exits.


The fact that relatively public information can have such a profound effect on the public valuation of a company is indicative of a lack of understanding within the shareholder base of their solar business.

Emcore sold $94M in stock (at $12.50/share) and warrants last month to an institutional investor base to fund the purchase of Intel’s optical components group. The investors are now sitting on a 50% loss. The company also convinced it’s convertible bondholders to swap their debt for equity at $7.50/share in an effort to clean up it’s balance sheet. The stock was selling for $11.77 at the time the deal was announced.

In short, There are some very angry investors to be sure and it will be interesting to see how this all shakes out. The company is in excellent financial condition at this point at the expense of the new equity holders.

What do we think about Solar?

The solar business is just like the memory business, where 95% of the volume is capital intensive commodity manufacturing. In the meantime people are excited about the various technologies. But the endgame is unchanged; build a really big factory and operate the complex technology better than your competitors (like DRAM or Flash), or focus on niche solutions with higher margins and R&D (Like Netlogic, Rambus, and other specialty memory makes).

The sooner the market discovers this the sooner it can move on to the next boom.

Turning and turning in the widening gyre

The falcon cannot hear the falconer;

Things fall apart; the centre cannot hold;

Mere anarchy is loosed upon the world,

The blood-dimmed tide is loosed, and everywhere

The ceremony of innocence is drowned;

The best lack all conviction, while the worst

Are full of passionate intensity.

– William Yeats – “The Second Coming


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