Monday, December 19, 2011

Valdor Technology (VTIFF) Shoots For Fiber Optic Niche

Fiber optic aficionados like the folks at Valdor Technology (VTIFF) are fond of well-crafted engineering solutions.  I don't doubt the quality of their product.  I admit skepticism about this company's ability to sell premium products in a heavily commoditized niche industry like fiber optic connectors.  I am concerned that the most recently available financial report on Valdor's website dates to Q1 2009 and it is unaudited.  The income statement shows progressively larger losses from 2008 to 2009 and there is a similarly widening "shareholder deficiency" on the balance sheet. 

Typical fiber optic connectivity involves cheap solutions like epoxies and gels.  The fiber optic market is dominated by big companies like Corning and 3M.  That seems to be good enough for the $2B annual market for cable and connections.  Valdor's premium product is aimed at a niche in high-performing systems operating in extreme environments.  There's nothing wrong with carving out a niche, provided it's sufficiently lucrative. 

Let's do a quick back-of-the-envelope example.  Lockheed Martin's F-35 Lightning II may be a prime candidate to have its fiber optic cables linked by the kind of clamped connectors offered by Valdor.  It needs cable for its control systems and must operate at high speeds in extreme conditions.  The problem lies in the size of the market.  The total planned production for the F-35 is probably no more than 3000 right now, including planned buys from non-U.S. partners.  I have no idea how many of these connectors would be needed on each aircraft, so I'll just assume ten per airframe.  The upper end of the market price range for one of Valdor's connectors is $35, so that's revenue of $350 per aircraft.  Multiply that by 3000 for a total market size of $1,050,000.  Note that the figure is not annualized, but represents the total lifetime product cycle revenue possible for that particular niche.  These are my uneducated guesses, of course, but that total is still a fairly small number compared to the total market for connection.  Perhaps each aircraft requires more connections for cable.  Perhaps Valdor can raise its price per installation.  Perhaps oil and gas wellheads, another potential target market, require much more numerous connections. 

It won't be difficult for the leading gel/epoxy manufacturers to tweak their formulas periodically to get just a little more adhesive capability.  A slightly improved mass solution at a lowball price is probably suitable for most applications anyway.  Products like Valdor's would be better candidates for on-site manufacture by high-tech customers themselves if Valdor is willing to license the technology for small batch use.  That's why I like engineers - they're adaptable.  I like Valdor's product, but I believe small-batch tech producers should change their business models from making products to making designs amenable to additive manufacturing

Full disclosure:  No positions in any companies mentioned.