Executive Summary / Key Takeaways

• CPS Technologies has executed a dramatic operational turnaround, transforming from a $4.25 million quarterly revenue business with negative gross margins in Q3 2024 to an $8.8 million revenue generator with 17% gross margins and positive operating profit in Q3 2025, demonstrating powerful operating leverage as demand for its metal-matrix composites accelerates.

• The company's proprietary AlSiC (aluminum silicon carbide) technology creates a defensible niche in high-growth markets including electric vehicle power electronics, renewable energy infrastructure, and defense systems, with recent wins including a $15.5 million contract from a multinational semiconductor manufacturer representing a 16.5% year-over-year increase in value.

• Government-funded R&D through multiple SBIR contracts acts as a de-risked innovation engine, spawning new commercial products like radiation shielding and ALMAX fiber-reinforced aluminum while requiring minimal internal R&D spend, with five Phase 1 awards and one Phase 2 award secured in 2025 alone.

• Margin expansion is structurally underway, with gross margins improving from 1% to 17% year-to-date, and management targeting low-to-mid-30% margins on 5-axis machined hermetic packaging components as new production capacity comes online and third-shift training costs normalize.

• The investment thesis hinges on execution of a planned 2026 facility move to double manufacturing capacity while managing customer concentration risk and competitive pressure from larger materials players like Materion and Rogers Corporation , with the stock trading at 2.15x sales reflecting early-stage turnaround valuation.

Setting the Scene: The Niche Materials Specialist

CPS Technologies Corporation, originally incorporated as Ceramics Process Systems Corporation in Massachusetts in 1984, has evolved from a ceramics startup into a specialized manufacturer of metal-matrix composites (MMC) for mission-critical applications. The company reincorporated in Delaware in 1987 and completed its initial public offering the same year, later changing its name to CPS Technologies in 2007 to reflect its focus on advanced material solutions. Today, CPS operates from a 38,000 square foot facility in Norton, Massachusetts, with a market capitalization of $65 million, positioning it as a micro-cap specialist in an industry dominated by multi-billion dollar conglomerates.

The business model centers on custom-engineered components that solve thermal management and lightweighting challenges for customers in electronics, power generation, automotive, and defense. CPS products are not commoditized commodities but application-specific solutions integrated into larger systems sold by original equipment manufacturers. This customization creates stickiness but also limits scale, as each component requires engineering collaboration and qualification processes that larger competitors often avoid. The company generates revenue through three primary product lines: AlSiC baseplates for power electronics, hermetic packaging for hybrid circuits, and proprietary HybridTech armor solutions, supplemented by a growing portfolio of SBIR-funded R&D projects.

Industry dynamics favor CPS's niche focus. The electrification of transportation, expansion of renewable energy infrastructure, and modernization of defense systems all demand materials that can manage extreme heat while reducing weight. Electric vehicle power electronics, high-speed rail systems, wind turbine converters, and satellite communications equipment all require thermal management solutions that traditional metals cannot provide efficiently. This structural demand shift creates a growing addressable market, but also attracts attention from larger materials companies with substantially greater resources and existing customer relationships.

Technology, Products, and Strategic Differentiation

CPS's core competitive advantage resides in its proprietary AlSiC MMC technology, which combines aluminum and silicon carbide to create baseplates with thermal conductivity significantly exceeding traditional metals while reducing weight by up to 60% compared to copper equivalents. This performance advantage translates directly into customer value: more reliable power electronics, longer component lifetimes, and reduced system costs. The technology is not easily replicable, requiring specialized infiltration processes, precise temperature control, and deep materials science expertise accumulated over decades. As CFO Chuck Griffith noted, "it's difficult to make, which means it's really hard for competitors to get into this market. You're not going to get a couple of pieces of equipment and put it in your garage and start making baseplates."

The hermetic packaging product line represents a second growth vector, where CPS assembles housings and packages for hybrid circuits using both MMC and traditional materials like aluminum, cold rolled steel, and Kovar . The recent addition of internal 5-axis machining capability, funded in part by $200,000 from the Commonwealth of Massachusetts, opens an addressable market exceeding $50 million for precision-machined hermetic components. Management targets gross margins in the low-to-mid-30% range for these high-value components, substantially above current company averages. First customer shipments are expected in summer 2025, representing the first new commercial product launch in many years.

Defense applications provide both revenue and technology validation. The company's HybridTech armor solutions, while currently facing near-term uncertainty due to government shutdown concerns, have demonstrated real-world value for U.S. Navy vessel protection. The armor business previously contributed approximately $2 million per quarter before contract completion in 2024, and management remains optimistic about future orders given strong defense budget indications and bipartisan support on Capitol Hill. More importantly, defense work funds core MMC process development that migrates to commercial applications.

The R&D pipeline, funded primarily through federal SBIR programs , acts as a force multiplier for innovation. In 2025 alone, CPS secured five Phase 1 contracts and one Phase 2 award, including a $1.15 million Army STTR for 40-millimeter warhead development and a $1.1 million DOE Phase 2 award for modular radiation shielding. These programs require minimal internal capital while producing commercializable products. The first commercial order for radiation shielding, received in Q4 2024, marked CPS's first new commercial product in years, and the company fulfilled its first ALMAX (fiber-reinforced aluminum) commercial order in Q3 2025. ALMAX targets a market exceeding $1 billion in aerospace bearings and titanium replacement applications.

Financial Performance & Segment Dynamics

The financial transformation is stark. Q3 2025 revenue reached $8.80 million, a 107% increase from $4.25 million in Q3 2024, marking three consecutive quarters of record revenue. This growth occurred despite the absence of armor revenue that had contributed $2 million quarterly in the prior year, demonstrating successful replacement and expansion in core MMC and hermetic packaging lines. For the first nine months of 2025, revenue totaled $24.39 million, up 61% from $15.19 million in the comparable 2024 period.

Gross profit margins tell the story of operational leverage and manufacturing maturity. Q3 2025 gross profit was $1.50 million, representing 17% of sales, compared to a gross loss of $520,000 (-12% margin) in Q3 2024. The nine-month gross margin improved to 17% from 1% in 2024. This expansion reflects several factors: absorption of fixed costs over higher volumes, improved production yields as third-shift operators gained experience, and a more favorable product mix. Management explicitly stated that one-time training costs and yield defects from new hires "hit the trough or hit the bottom maybe October, November of last year," suggesting margins have room for further improvement as efficiency gains continue.

Operating profit achieved positive territory at $276,000 in Q3 2025, reversing a $1.49 million operating loss in the prior year period. Selling, general, and administrative expenses increased modestly to $1.23 million from $963,000, driven by higher variable compensation from stronger results and increased commissions on higher revenue. The operating leverage is evident: revenue grew 107% while SG&A increased only 28%, demonstrating the scalability of the business model at current volumes.

Cash flow and liquidity provide strategic flexibility. As of September 27, 2025, CPS held $3.23 million in cash and $1.05 million in marketable securities, with no borrowings against its $3 million revolving credit facility. The October 2025 equity raise of 3.45 million shares at $3.00 per share generated $9.54 million in net proceeds, bringing pro forma liquid assets to approximately $13.8 million. This capital, combined with expected operational cash generation, funds the planned facility move and capacity expansion without requiring debt financing.

Days sales outstanding improved to 55 days from 75 days at year-end 2024, reflecting more even revenue distribution and better collections. Inventory turnover increased to 5.20 times from 4.80 times, indicating improved working capital management as production processes mature.

Outlook, Management Guidance, and Execution Risk

Management guidance points to sustained momentum tempered by seasonal realities. Brian Mackey stated that while Q4 2025 "will be strong," it is "unlikely due to holidays, planned plant shutdowns at some of our vendors and customers, et cetera, for our fourth quarter results to achieve another quarter of record revenue," a pattern consistent with past years. However, the outlook for fiscal 2026 "remains strong," supported by robust demand and an expanding backlog.

The $15.5 million semiconductor contract, which began October 1, 2025, provides 12 months of revenue visibility with deliveries expected to be "relatively stable throughout the period." Management plans to build inventory ahead of the facility move to avoid customer disruption, suggesting confidence in demand continuity. The contract's 16.5% year-over-year increase in value reflects expanding demand for CPS's high-performance, application-specific solutions in power modules supporting high-speed rail, energy infrastructure, and grid applications driven by data center growth.

The facility move represents the critical execution milestone for 2026. Management is actively searching for a location near the current Norton facility that will nearly double usable floor space from approximately 38,000 square feet. The move, expected to be completed during calendar year 2026, addresses capacity constraints and enables accelerated weekly production quantities as new equipment comes online. The $9.54 million equity raise was explicitly tied to this expansion, with proceeds covering relocation costs, facility fit-up, and capital equipment.

Third-shift optimization remains an ongoing process. The new shift began operating in late August 2024, creating a "big learning curve" that reduced product yields and increased labor costs by approximately $200,000 in Q4 2024. Management asserts these one-time costs are largely behind the company, with new operators gaining experience and yields improving. This operational leverage should drive margin expansion through 2026 even without price increases.

Risks and Asymmetries

Customer concentration presents the most immediate risk to revenue stability. Management acknowledges selling to a limited number of customers and notes that loss of any one could necessitate additional external financing. The $15.5 million semiconductor contract, while valuable, likely represents a substantial portion of annual revenue, creating dependency on a single customer's demand cycle and inventory management decisions. This concentration limits negotiating power and amplifies the impact of any customer-specific slowdown.

Scale disadvantages relative to competitors materially impact cost structure and market positioning. With approximately $30 million in annual revenue, CPS is orders of magnitude smaller than Materion ($445 million quarterly revenue), Rogers ($216 million), ATI ($1.13 billion), and 3M ($6.3 billion). This size differential translates into higher per-unit procurement costs, less favorable equipment financing terms, and limited ability to absorb fixed costs. While CPS's niche focus enables premium pricing in specialized applications, larger competitors can leverage scale to undercut on price or bundle materials solutions that CPS cannot match, potentially capping market share gains.

The facility move, while necessary for growth, introduces execution risk typical of manufacturing transitions. Any delays in identifying suitable property, completing build-out, or transferring equipment could disrupt deliveries to the $15.5 million contract and other customers. Management plans to build inventory ahead of the move, but this consumes working capital and may not fully mitigate customer concerns about supply continuity.

Government funding uncertainty creates risk for both armor and R&D revenue streams. The near-term outlook for armor orders "remains uncertain due to the government shutdown," and while management notes that "federally funded research projects that are already under contract" continue, new proposal evaluations and contract awards face potential delays. The radiation shielding program's first commercial order was canceled "due to reasons unrelated to CPS," highlighting that even successful SBIR commercialization depends on end-market adoption beyond the company's control.

Competitive dynamics in core MMC markets are intensifying. Several larger customers also purchase from CPS's "major competitor in Japan," and foreign exchange fluctuations can make CPS's pricing more or less competitive. While management believes CPS is "picking up market share" and "picking up some new customers, which is probably taking someone else's business," larger competitors are not standing still. Materion's beryllium composites, Rogers' polymer-based thermal solutions, and ATI's alloy expertise all represent alternative technologies that could displace AlSiC in certain applications if performance or cost advantages shift.

Valuation Context

Trading at $3.60 per share, CPS Technologies carries a market capitalization of $65.08 million and an enterprise value of $61.17 million, reflecting minimal net debt. The stock trades at 2.15 times trailing twelve months sales and 2.02 times EV-to-revenue, positioning it at a slight premium to Materion (1.56x P/S) but at a discount to ATI (3.33x) and 3M (3.62x). Rogers Corporation trades at a similar 2.14x sales multiple despite generating $1.72 billion in market cap, illustrating the valuation compression that can affect specialized materials players with uneven profitability.

CPS's current valuation reflects its turnaround stage rather than mature earnings power. The company generated negative free cash flow of $4.47 million on a trailing basis, though quarterly operational cash flow turned positive at $649,256 in Q3 2025. With approximately $13.8 million in pro forma liquid assets following the October 2025 equity raise, the company has roughly three years of runway at current burn rates, providing time to execute the facility expansion and achieve sustainable cash generation.

Profitability metrics remain in transition. The 12.53% gross margin and 3.14% operating margin for the trailing twelve months mask the improving trend, with Q3 2025 delivering 17% gross margins and positive operating leverage. By comparison, Materion generates 19.5% gross margins with 8.1% operating margins, while Rogers achieves 31.8% gross margins but negative net margins due to restructuring costs. CPS's margin trajectory suggests potential convergence toward peer levels as volumes scale and yield improvements continue.

The balance sheet strength, with a 3.12 current ratio and 0.02 debt-to-equity ratio, provides strategic flexibility uncommon in micro-cap manufacturing. This financial conservatism, combined with the non-dilutive nature of SBIR funding for R&D, creates a capital-efficient growth model that larger competitors with significant debt burdens (ATI at 1.04x D/E, 3M (MMM) at 2.82x) cannot replicate. However, the small absolute scale means that even modest absolute dollar increases in SG&A or capex represent meaningful percentages of revenue, requiring disciplined capital allocation.

Conclusion

CPS Technologies has engineered a compelling turnaround by combining proprietary materials science with operational execution and government-funded innovation. The transformation from a $4.25 million quarterly business with negative margins to an $8.8 million revenue generator with 17% gross margins and positive operating profit demonstrates that demand for specialized MMC solutions is real and growing. The company's ability to replace $2 million in quarterly armor revenue while more than doubling overall sales validates its diversification strategy and market positioning.

The investment case rests on two interdependent factors: successful execution of the 2026 facility expansion to capture growing demand, and continued margin expansion as third-shift training costs normalize and 5-axis machining capacity comes online. The $15.5 million semiconductor contract provides revenue visibility, while the SBIR pipeline de-risks new product development in radiation shielding and ALMAX. However, customer concentration and scale disadvantages relative to Materion (MTRN), Rogers (ROG), and ATI (ATI) create vulnerability to pricing pressure and demand fluctuations.

Trading at 2.15x sales with improving margins and a strengthened balance sheet, CPS offers a unique micro-cap play on the electrification and defense modernization megatrends. The stock's valuation reflects early-stage turnaround risk rather than mature execution, creating potential upside if management delivers on its facility expansion and margin targets. The critical variables to monitor are yield improvements on the third shift, timing of the facility move, and any signs of customer concentration risk materializing in the form of order delays or cancellations. If CPS can navigate these execution challenges while maintaining its technological edge, the company may achieve the scale and profitability necessary to command a valuation multiple more aligned with its larger, more diversified peers.