Why Navitas Semiconductor Rallied Today

Shares of small-cap power semiconductor designer Navitas Semiconductor (NASDAQ: NVTS) rallied on Monday, up 24.5% during the day's trading.

While Navitas didn't release any financial information today, a news report on a new product partnership in India was enough to send the stock flying higher.

Navitas' customer win in India validates the transformation

For those unaware, Navitas has been engaged in a business transformation for over a year now. Initially a designer of power-related semiconductor chips for the mobile phone charging market, Navitas has embarked on transforming its power chip expertise into the production of gallium nitride (GaN) and silicon carbide (SiC) chips for AI data centers.

That transformation is hurting near-term results, as the company deliberately sheds its old business. Last quarter, revenue sank 38.6% to just $8.6 million, as the new high-power products have not yet offset declines in legacy products.

That's why perhaps today's report of a partnership between Navitas and Indian chip company Cyient Semiconductors is lifting shares so much. Today, Cyrient announced seven new products for the Indian market, based on Navitas' GaN technology. According to the announcement, the chips will target "next-gen power applications." At the same time, the announcement also said the partnership represents "the foundation of a broader GaN portfolio that will address the growing power and efficiency demands of AI infrastructure, industrial systems, consumer power, and e-mobility applications."

The new partnership could signal future revenue acceleration and, therefore, validate the turnaround strategy. Therefore, the stock rallied on the news.

Also likely contributing to the move is Navitas' high short interest, which stood at 21% of shares outstanding and 28% of the publicly traded float as of April 15. When a heavily shorted stock receives good news, it can easily spark a short-covering rally beyond what fundamentals might suggest. This is what meme-stock investors target by piling into highly shorted stocks.

Image source: Getty Images.

Navitas' turnaround may happen, but be cautious

It should be noted that no financial numbers were disclosed as a result of the partnership, so investors don't really know the impact on Navitas' financials beyond the announcement.

Meanwhile, Navitas' stock has rallied to a $5.4 billion market cap, which is 135 times its trailing month sales.

True, these sales probably aren't indicative of the higher financials Navitas may earn if and when its business has navigated this transition to the AI data center market. However, the stock is still likely well ahead of even those fundamentals at this price.

Billy Duberstein and/or his clients have no position in any of the stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.