The semiconductor industry has been in turmoil in recent years, and it's not just Nvidia And Advanced microsystems bringing substantial gains to investors. The digital economy is constantly expanding and more and more products and services require advanced hardware chips, creating opportunities for a number of businesses.
Axcelis Technologies (NASDAQ:ACLS) is one of them. Shares of the semiconductor services company have soared more than 440% over the past five years, even after factoring in the recent 36% decline from its all-time high.
Axcelis just released its full-year 2023 financial results and reported record sales and profits. Investors were disappointed by the company's forward guidance, but its shares have now fallen to the point where they are trading at an absolutely stellar valuation. Here's why it might be time to buy.
Axcelis is essential to the semiconductor industry
Axcelis Technologies is valued at just $3.9 billion, so it's tiny compared to the trillion-dollar giant that Nvidia has become. But Axcelis does not make chips, but ion implantation equipment essential to the manufacturing process. Demand for chips continues to grow, so producers are increasing their manufacturing capacity, which requires more hardware from Axcelis.
In fact, the company currently has an order backlog of $1.2 billion, which is close to an all-time high.
Axcelis' record year was driven by the electrical appliances market. Electrical devices regulate the transfer of electrical energy between the source and the load, for example from a battery to the electric vehicle (EV) it powers. Electric vehicles are a huge source of demand, especially when it comes to silicon carbide chemicals, which make lighter, more energy-efficient electrical devices. Axcelis is a specialist in this field.
The company expects strong demand for electric vehicles to continue, particularly in China. But it is also preparing for a return to mature process markets like computer processors and memory (DRAM) and storage (NAND) chips. These have been low since 2022 as the industry overproduced following supply chain disruptions due to the pandemic, leading to overproduction which depressed prices.
Axcelis believes in artificial intelligence (AI) could be a driving force behind the return. Doug Lawson, chief executive, said AI-enabled personal computers, for example, require far more DRAM than traditional computers, meaning manufacturers will need to increase capacity to meet a new wave of demand. Axcelis expects this to become a tailwind in the second half of 2024 and into 2025, but chipmakers like Micron technology and Advanced Micro Devices are showing signs that the worst inventory and pricing problems are already over.
In other words, these segments could rebound faster than expected.
Axcelis achieved record revenue and profits in 2023
Axcelis generated record revenue of $1.13 billion in 2023, representing 23% year-over-year growth. The result beat the company's latest forecast, which it raised twice during the year as it consistently beat expectations each quarter.
This translated into earnings per share (profit) of $7.43, which is also an all-time high. This figure increased by 36% compared to 2022, and prudent spending management played a role in this good result. Axcelis's operating costs rose just 19% year over year, which was slower than its revenue growth, so more money went to the bottom line net in the form of profit.
The company's forward guidance has investors concerned. Management is forecasting revenue of $242 million for the first quarter of 2024, which would represent a 5% year-over-year decline. Full-year revenue is expected to reach a similar level to 2023, suggesting there likely won't be any sales growth at all this year.
However, the company projected revenue of $1.3 billion for 2025. While it might take a breather this year, the growth story is certainly not over.
Axcelis stock is very cheap compared to the rest of the semiconductor industry
As I discussed earlier, Axcelis stock has seen a massive rise over the past five years, although it is currently trading 36% below its all-time high. It is possible that the decline has gone too far.
Based on the company's earnings per share of $7.43 last year and its current stock price of $122.25, it trades at a price-to-earnings (P/E) ratio of just 16, 5. It is extremely cheap compared to iShares Semiconductor ETF which trades at a P/E ratio of 33.4 – and Axcelis is actually part of this ETF.
In other words, Axcelis stock would have to more than double just to trade in line with its semiconductor sector peers. The stock is also cheap relative to the benchmark S&P500 (P/E ratio of 22.1) and the Nasdaq-100 technology index (P/E ratio of 30.9).
Despite its weak guidance, Axcelis has a history of beating its forecasts and its backlog still stands at $1.2 billion, which is close to an all-time high. If the company sees a larger-than-expected rise in the market for processors, memory and storage chips this year, it could result in a positive surprise for its financial results.
Even though 2024 is a flat year for Axcelis, investors willing to hold the stock through 2025 and beyond will likely do well if they buy now at its bargain price.
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