PhonlamaiPhoto

ACM Research (NASDAQ:ACMR), a supplier of semiconductor manufacturing equipment, is looking to recoup some of the losses suffered in 2023. The stock has outpaced most semis in recent months, aided in part by the worst-case scenario not coming to pass, which had caused major problems for ACMR. Why will be covered next.

The stock is at a pivotal point

ACMR had a tough 2022 with the stock losing 72.9% of its value. However, 2023 has been a different story thus far with the stock gaining 44.9% YTD. In comparison, the iShares PHLX Semiconductor ETF (SOXX) has gained 23.4% YTD. The chart below shows how the stock has trended higher after the stock closed at $6.22 on November 3.

Source: finviz.com

It’s no coincidence the rally began on November 4. AMCR released its Q3 report on that day with numbers that were well ahead of expectations, which managed to soothe some of the concerns people had coming into the report. Recall, for instance, how the stock lost 26.5% of its value on October 10 after the U.S. government imposed new trade restrictions that limit the flow of semiconductor manufacturing equipment to China.

AMCR depends on China for almost all its revenue, which is why ACMR was hit hard by the announcement. In fact, ACMR’s exposure to China was arguably the main reason why the stock performed as badly as it did in 2022. For instance, for much of 2022, the stock was weighed down by fears the U.S. government could delist China-related stocks due to a dispute with the Chinese government regarding accounting regulations. The accounting issue has been resolved, but the relief did not last long for ACMR with the imposition of new trade restrictions on its most important market.

The Q3 report was welcome in that sense as it suggested that while the trade restrictions are a negative, the impact would not be as bad as feared. This helped trigger a stock rally that continues to this day. The rally shifted into higher gear on January 3 when ACMR suggested FY2023 revenue of $515-585M, an increase of around 41-52% YoY. This pleased the market as it suggested that ACMR was still very much a growth story in spite of the trade restrictions.

However, it’s worth noting how the stock is currently close to falling below the lower trendline that has been in place since the rally started on November 4. While the stock remains in an uptrend, the stock has faded in recent weeks. It has lost 22.4% since the 2023 high of $14.40 on February 15. On the other hand, the trendline was able to fend off previous challenges, including as recently as early March, so support may hold the line again.

But if support fails and the stock falls below the lower trendline, that could open the door for a retest of the October/November lows. The stock is thus at a pivotal point. Longs may want to keep an eye on what the stock does in the coming days. If the stock breaches the trendline, longs may want to reduce their exposure. If support holds, longs may want to do the opposite. A stock close to support holding strong makes for a good entry point.

Guidance offsets short-term headwinds

FY2023 guidance stole the spotlight, but it’s nevertheless worth mentioning that ACMR is in a downturn, in part due to recent trade restrictions. The most recent report makes this clear. For instance, FY2022 revenue increased by 49.7% YoY to a record $388.8M as shown below. EPS also grew, but not as much, primarily because of higher operating expenses.

In terms of GAAP, opex rose by 63.6% YoY to $124.6M, which affected the bottom line. Keep in mind that ACMR has invested heavily in product development to open up new markets. For example, ACMR has recently entered the CVD and track markets with new tools. ACMR finished FY2022 with $248M in cash and cash equivalents on the balance sheet.

(Unit: $1000, except EPS)

(GAAP)

FY2022

FY2021

YoY

Revenue

388,832

259,751

49.69%

Gross margin

47.2%

44.2%

300bps

Operating income

59,035

38,702

52.54%

Net income (attributable to ACMR)

39,263

37,757

3.99%

EPS

0.59

0.58

1.72%

(Non-GAAP)

Revenue

388,832

259,751

49.69%

Gross margin

47.4%

44.4%

300bps

Operating income

66,765

43,819

52.37%

Net income (attributable to ACMR)

54,848

42,267

29.77%

EPS

0.83

0.65

27.69%

Source: ACMR Form 10-K

However, the FY2022 numbers mask the current slowdown. The Q4 numbers were actually better than expected, but they still represented a sizable decline compared to the record-setting Q3, which could have been avoided if not for trade restrictions. The table below shows how the numbers took a hit in Q4 FY2022.

(Unit: $1000, except EPS)

(GAAP)

Q4 FY2022

Q3 FY2022

Q4 FY2021

QoQ

YoY

Revenue

108,542

133,709

95,142

(18.82%)

14.08%

Gross margin

49.6%

49.3%

47.8%

30bps

180bps

Operating income

16,670

31,636

19,126

(47.31%)

(12.84%)

Net income (attributable to ACMR)

11,809

21,004

15,565

(43.78%)

(24.13%)

EPS

$0.18

$0.32

$0.23

(43.75%)

(21.74%)

(Non-GAAP)

Revenue

108,542

133,709

95,142

(18.82%)

14.08%

Gross margin

49.7%

49.4%

47.9%

30bps

180bps

Operating income

19,164

33,529

20,420

(42.84%)

(6.15%)

Net income (attributable to ACMR)

12,596

28,178

18,069

(55.30%)

(30.29%)

EPS

$0.19

$0.42

$0.27

(54.76%)

(29.63%)

Source: ACMR Form 8-K

The Q4 report did not move the stock much. Part of it was because ACMR showed enough for the market to believe it could overcome the current downturn. FY2023 guidance played a role here. Furthermore, shipments reached a record $197M in Q4, suggesting revenue growth will accelerate towards the latter part of FY2023 once tools pass customer acceptance.

In addition, ACMR is making progress in reducing its reliance on China, which accounted for 97.2% of FY2022’s revenue of $388.8M. For instance, AMCR reported that it had received a purchase order from a new customer in Europe on the same day the Q4 report was released. ACMR also believes more sales to Europe and the U.S. are to be expected, on top of continued growth in China. From the Q4 earnings call:

“For 2023, we expect growth from our China-based customer with a share gain in our core cleaning tool and SAP and the furnace product cycle. We also anticipate initial sales to the U.S. and European markets. We have two cleaning tools at the U.S. facility of a large U.S.-based manufacturer. An evaluation is going well, and we are optimistic it will lead to additional orders from them in 2023.”

A transcript of the Q4 FY2022 earnings call can be found here.

ACMR is an outlier

Earnings forecasts have been revised accordingly. Consensus estimates predict non-GAAP EPS of $0.05 on revenue of $74M in Q1 FY2023, a major drop QoQ, but these numbers are expected to improve to non-GAAP EPS of $0.82-1.24 on revenue of $525-550M by the time FY2023 is done, which is significantly better than the $0.83 earned on revenue of $388.8M in FY2022.

Keep in mind that ACMR is going against the tide. The wafer fab equipment market is forecast to shrink by 22% YoY to $76B according to a recent forecast from SEMI, so for ACMR to grow at a time when most of its peers will not is quite an achievement.

ACMR

Market cap

$684.79M

Enterprise value

$562.96M

Revenue (“ttm”)

$388.8M

EBITDA

$64.4M

Trailing GAAP P/E

19.38

Forward GAAP P/E

13.21

PEG GAAP

7.02

Price/sales

1.75

Price/book

1.01

EV/sales

1.45

Trailing EV/EBITDA

8.74

Forward EV/EBITDA

6.03

Source: SeekingAlpha

Not only is AMCR expected to grow this year in a tough environment, unlike many of its peers, but ACMR is fairly inexpensive for a stock that could grow the top line by 41% and the bottom line by 49.4% at the high end of FY2023 earnings forecasts. ACMR, for instance, trades at 13.2 times forward GAAP earnings with a trailing P/E of 19.4. In comparison, the sector medians are 23.6 and 22.3 respectively. The stock is also valued at book value.

Investor takeaways

It’s tempting to be a buyer of ACMR, but I am nonetheless neutral on ACMR as stated in a previous article. True, the stock is rather inexpensive with multiples where they are, even after the recent rally, especially for a company that could grow the top and the bottom line by around 40+% this year at a time when many expect falling sales due to a weakening market for semiconductor chips.

ACMR could be on the verge of a breakthrough in terms of adding new customers in Europe and the U.S., which would address some of the concerns people have regarding its dependence on China. ACMR is entering new markets with new tools that are already released or in the pipeline, which bodes well for future growth. While recent quarterly numbers have dipped, shipment data suggests growth will pick up. The charts do suggest it is time to be careful, but as long as support has not been broken, the trend is pointing higher. Long ACMR has strong arguments in its favor.

However, there’s a reason why multiples are so low. ACMR is a risky stock. ACMR remains heavily exposed to China and that will remain the case for many years to come, even with all the recent progress in diversification. ACMR remains vulnerable to selloffs if or when the U.S. government decides to impose new sanctions on China, something that has happened several times before. It’s true the rules have not been that bad for ACMR since most sales have not been affected, but that could change.

Keep in mind that the U.S. government has gradually tightened restrictions on China. For instance, the rules once targeted tools for the 10nm process node or smaller, but this has been expanded to include those for the 14/16nm node. There are calls to raise the limit to the 40nm node. ACMR has managed to ease concerns regarding trade restrictions in recent months, which has made the recent rally possible, but AMCR is by no means out of the woods.

ACMR could face further restrictions by the U.S. government. There is also reason to question how successful ACMR will be in its foray outside of China. ACMR will have to go up against Lam Research (LRCX) and Applied Materials (AMAT) outside of China and it won’t be easy to displace long-held relationships incumbents have with foundries and IDMs, especially not by a newcomer.

Bottom line, ACMR could be a winner, but it is also a very risky stock due to its heavy exposure to China. If nothing else happens on the U.S.-China trade front, ACMR could continue to go higher since the stock is rather cheap for a company expected to grow as fast as it is in 2023, in contrast to some of its peers that are more expensive with little to no growth to show for it.

However, a look back at recent history suggests expecting nothing to happen may be too much to ask for. There has been a gradual trend towards more and more restrictions and every time there have been new rules, the stock has taken a pounding. The stock can go on huge rallies, but it is also prone to selloffs just as large.

This cycle of rallies followed by selloffs and vice versa has been repeated numerous times before, which may give some people pause after the recent rally. There is after all a reason why the stock has struggled in the last few years, even though ACMR has grown by leaps and bounds. There have been huge rallies in the stock, only for gains to disappear as quickly as they arrived.

In the end, there is no one size fits all when it comes to ACMR. Long ACMR could have made a stronger case if not for the China issue, but once the possibility of further U.S. sanctions are taken into account, the case becomes much less clear-cut. If someone is willing to accept the risk, ACMR is worth considering. Just don’t be surprised if the U.S. government plays the spoiler by triggering another selloff in the stock.