LightPath Stock Eyes 50% Upside on Defense Demand Surge

Key Points

• LightPath is in a hypergrowth phase and on track to grow its business by triple digits.
• Its lighter, more affordable products are critical to the drone and UAV industry.
• Analysts are raising their targets, pointing to a 50% price gain at the high end, likely a low target given the growth outlook.

LightPath Technologies' NASDAQ: LPTH stock price is on track for a 50% upside, as the FQ1 release reaffirms its robust outlook. The company’s infrared and imaging technology is in increasing demand for industrial and defense purposes due to its capability, quality, and supply chain, which is centered in the U.S. In-house production of critical components ensures quality while maintaining qualification for national defense projects, which are a primary source of revenue. 

Among the critical applications are drones and UAVs, central to defense modernization and spending plans, and among the hottest growth markets in the defense industry. LightPath Technologies products are built with its proprietary BlackDiamond glass, providing lighter, more affordable options free from supply chain disruptions. 

LightPath Technologies Accelerates Growth in FQ1

LightPath Technologies had a solid quarter in fiscal Q1, growing its revenue by 80% year-over-year to $15.1 million, nearly 1000 basis points better than expected. The strength was driven by three of the four operating segments, with the core Infrared segment up 63%, Visible Components up 16%, and Assemblies & Modules up more than 430% on an acquisition-adjusted basis. 

The margin news is mixed but otherwise favorable to shareholders. The company reported margin compression and missed the EPS consensus estimate, but the root causes mitigate it. Margin compression is due primarily to increased spending, advertising, one-offs, and non-cash impairment, with spending and advertising expected to drive growth. One-offs and non-cash impairment are less of a concern; the growing backlog and improving scale have the company on track to achieve GAAP profitability within the next two to three years. 

As it is, the company posted a GAAP loss in Q1. Still, it inflected to EBITDA profits and is expected to sustain it in future quarters. The question is whether it has sufficient capital to maintain operations until profitability is achieved without additional dilution. The recent injection by Ondas Holdings NASDAQ: ONDS is worth $8 million at face value and lifted the cash balance to over $11 million, which is sufficient for four to five quarters at the FQ1 burn rate. With the backlog swelling to over $90 million and order growth expected to continue, positive cash flow may be achieved in time. Ondas's interest in LightPath is the belief that expanding awareness of LPTH products will help boost demand for its drones. 

Analysts' Sentiment Firms Following LightPath Technologies’ Q1 Release

The initial analyst response to LightPath’s earnings release is bullish, aligning with the prevailing trend. MarketBeat tracked two revisions, including two price target increases to $10. This represents an average 35% increase in the price target, equating to a 25% upside relative to mid-November price points. Highlights of the reports include excitement over the growing backlog and potential for business momentum to build over the subsequent two years. H.C. Wainwright’s analyst sees transformational opportunities for the business and rates it a Buy, compared to the consensus Moderate Buy. 

The institutions are a risk. The group owns more than 55% of the stock and could pose a significant headwind if they sell, which they did, on balance, in October and early November. If this continues, the LPTH stock price will struggle to advance. However, profit-taking will likely end, and the group will revert to buying due to the improving outlook and hypergrowth opportunity.

Turning to the chart, it shows selling resistance at the $8 level, along with a very bullish setup. The price action is forming a Bullish Flag with rising volume and a converging MACD, setting up an extension of the rally. The market could rise by $5 from its critical support target in this scenario, more than 50%, putting it at $12 within the next few quarters and in alignment with the high end of the analysts' range.