NVE Corporation NVEC, the Eden Prairie-based spintronics pioneer, has always been a darling of value investors. Known for its sky-high margins and robust profitability, the company has, at times, been criticized for its conservative approach to growth, prioritizing profitability over aggressive expansion. However, the recent Q4 2024 earnings call hinted at a seismic shift in this strategy, revealing a bold multi-million dollar gamble that could redefine NVE's future.

While analysts focused on the industry's anticipated recovery and NVE's solid earnings despite a revenue dip, a less-noticed detail in CEO Daniel Baker's remarks suggests a far more ambitious play: a major investment in wafer level chip scale packaging. NVE plans to pump $4 to $5 million into capital investments over the next two fiscal years, "some of our largest capital investments ever," according to CFO Daniel Nelson. This isn't just about capacity expansion; it's about bringing the production of chip scale packages in-house, a move with potentially far-reaching implications.

NVE's current product portfolio, already impressively miniaturized, relies heavily on outsourced semiconductor assembly and test (OSAT) subcontractors in Asia for packaging. Chip scale packaging, however, promises an even more radical reduction in size, pushing the boundaries of miniaturization further than ever before. While NVE has dabbled in chip scale packaging prototypes, generating significant customer interest, the new investment suggests a full-fledged commitment to this technology as a core driver of future growth.

This is where the "gamble" comes in. NVE is betting big on chip scale packaging, shifting from its traditional reliance on OSATs to in-house production. While onshoring offers greater control over quality and supply chains, particularly after the vulnerabilities exposed by the COVID-19 pandemic, it also entails substantial upfront investment and operational complexities.

Why is NVE making this bet? The answer lies in the unique advantages that chip scale packaging offers. In fields like implantable medical devices, where NVE is a key supplier to industry leader Abbott, smaller means less invasive procedures, smaller incisions, and reduced risk of complications. The potential for market share gains in this high-value segment alone could justify the investment.

Beyond medical devices, chip scale packaging opens doors to a wider range of industrial applications where precision and miniaturization are paramount. Think smaller, more accurate sensors for the Industrial Internet of Things (IIoT) and other industrial automation solutions.

Hypothesis: Dominating Implantable Medical Devices

Here's a potential hypothesis based on the information provided: NVE is aiming to leverage chip scale packaging to gain a dominant market share in the implanted medical devices sector. The company's long-standing partnership with Abbott, evidenced by the recent extension of their supplier partnering agreement, provides a strong foundation for this strategy. If successful, NVE could capture a significant portion of Abbott's growing market, driving substantial revenue growth.

The Numbers: Potential vs. Risk

Let's look at some numbers. The global market for implantable medical devices was estimated at $103 billion in 2022 and is projected to reach $144 billion by 2028. If NVE, through its chip scale packaging technology, can capture even a 5% share of this market, that translates to over $7 billion in potential revenue by 2028. This would represent a staggering increase from NVE's current annual revenue of around $30 million.

However, this optimistic scenario hinges on several factors. NVE's success in scaling up its in-house chip scale packaging production, navigating the complexities of the new technology and securing regulatory approvals for medical applications will be crucial. Competition from existing players in the chip scale packaging market, particularly in Asia, is another potential challenge.

A Calculated Gamble

Despite the risks, NVE's gamble is a calculated one, driven by a combination of customer demand, market opportunities, and a desire for greater control over its destiny. If successful, this bold move could propel NVE from a niche player to a global leader in spintronics-based chip scale packaging, unlocking massive growth potential and solidifying its position as a true technological innovator.

"Fun Fact: NVE holds over 100 patents related to spintronics, a testament to its commitment to research and development. The company's technology has even been used in space exploration, with its sensors deployed on NASA missions!"