May 30, 2007

Investing in Fiber Laser Technology

From a commentary on Zacks.com:

IPG Photonics (IPGP) is the clear leader in the fiber laser market, controlling an estimated 70% share of the market.

Lasers are used for a wide variety of applications, ranging from medical incisions to printing to telecommunications transmission. Traditional lasers use a series of mirrors and lenses to produce a laser beam. By contrast, fiber lasers are constructed with fiber optic coils and cables. Currently, fiber lasers account for less than 10% of the total laser market.

Competitive Advantages

IPGP has significant cost and technology advantages over the competition. The company was the first to target the fiber laser market, and has developed a particularly strong expertise in making these high-power, difficult-to-produce lasers -- which are used for specialty functions like cutting and welding large metal pieces and parts for products like airplanes.

IPGP has a virtual monopoly on the high-power laser market. While it's possible other laser manufacturers could enter this space, it takes time to develop the required technical competencies and manufacturing processes. Building fiber lasers requires a different set of technical skills than traditional lasers, so existing competitors can't necessarily translate their competencies in traditional laser manufacture to the fiber market.

In addition, IPGP has built out significant manufacturing capacity for key parts of its fiber laser systems. That list includes amplifiers, fiber optic components, and semiconductor diodes for emitting light.

By building large-scale factories and streamlining operations, management has significantly reduced production costs. The company has also essentially eliminated the need to buy finished parts from outside suppliers. By controlling the manufacturing of both parts and finished laser systems, IPGP is vertically integrated, making it more difficult for competitors to penetrate the market.

Growth Drivers

The most obvious growth driver for IPGP is the replacement of traditional laser systems with fiber lasers. Since fiber lasers currently account for less than one-tenth of the global laser market, there's significant room to grow simply by taking share.

In that regard, growth will be driven by the superior performance of fiber laser technology. Specifically, fiber lasers offer a higher quality beam than traditional lasers -- a major advantage, particularly when it comes to precise cutting functions. Fiber lasers are also smaller, lighter and more portable than older-style systems.

In addition, fiber lasers are also less expensive to operate. Traditional lasers include mirrors and lenses that need periodic tuning to remain usable -- fiber lasers don't require many of these parts. Furthermore, fiber lasers tend to heat up less than traditional systems, causing less stress on internal parts. And finally, fiber lasers require less energy to run. All of these factors cut down on operating and maintenance costs.

Traditionally, fiber lasers were more expensive to produce, but the picture has changed in recent years. The prices of key components like fiber optic cable and diodes have plunged as manufacturing processes have been refined. Thus, manufacturing cost isn't really an issue with these lasers any longer, removing a major impediment to the growth of the industry.

IPGP has seen its revenues jump nearly seven-fold over the past five years. Given its already commanding lead in the fiber market, that growth is a sure sign that the company has begun taking share from traditional laser manufacturers.

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