Amkor technology: there is more to like than not to like

IC comes out of packing tube

yclinf

Amkor Technology (NASDAQ:AMKR) has seen a lot of volatility lately. The actions are being dragged along by forces that have opposing points of view. On the one hand, the stock is facing downward pressure from the perception that demand for semiconductors is weakening, especially with recent downgrades in earnings prospects for industry heavyweights. On the other hand, the stock is benefiting from trading at low valuations and strong guidance with AMKR doing a good job of managing the various headwinds, in part helped by the industry’s growing interest in advanced packaging. There is still a case to be made for AMKR long. Why will be covered below.

AMKR is being bounced

AMKR has seen its shares fall this year, as have most companies. However, it is worth mentioning that AMKR has done better than most semis in this regard. For example, the iShares PHLX Semiconductor ETF (SOXX) has lost 33% YTD. By comparison, AMKR is down 24% YTD. AMKR has outperformed in that regard.

Still, the stock has been very volatile lately. The stock lost about 25% in June, only to recover it all and then some with a nearly 50% gain in July. However, the stock has changed course and is now heading lower once again. The stock has lost about 20% since the beginning of August. All of this happened in the span of about three months, as shown in the chart below.

AMKR Chart

Source: finviz.com

The stock is rebounding, hostage to the changing headlines. For example, stocks suffered when the COVID-19 lockdowns were imposed in China, something that would return to AMKR’s earnings reports. Shares rallied with the lifting of restrictions, giving AMKR a chance to return to normal trading activities and an improvement in quarterly results.

However, the most recent drop in shares coincided with weak forecasts from industry heavyweights such as Micron (MU) and Nvidia (NVDA). Both cited weakening demand for chips as justification for lowering their earnings outlook. The double whammy caused semis to be sold, including AMKR.

The belief is that reduced demand for semiconductors will result in reduced demand for OSAT services from companies like AMKR. On the other hand, it is worth noting that while admittedly more difficult, individual names can still thrive in an environment where overall demand for semiconductors is low. After all, not all companies rely on OSAT services. Some companies rely on their own in-house testing and packaging for their products.

For example, a shift in consumer demand toward off-factory designer products using OSAT services and away from IDMs that rely on in-house contracting could create additional business opportunities for a company like AMKR. This is where something like advanced packaging could come in and make a difference. AMKR can create added value to entice customers to make the switch to benefit. AMKR is not necessarily doomed if or when a recession hits. It depends on how severe the conditions are, assuming they get there in the first place.

Earnings growth holds at AMKR

Part of the reason AMKR hasn’t sold as much as some of the other semiconductor names is that AMKR hasn’t yet reported a significant deterioration in its earnings outlook like the semis mentioned above. On the contrary, growth is expected to recover. The lifting of restrictions in China and the return to normal production levels in the third quarter help in this regard.

However, the numbers in the second quarter were affected by lockdowns in China. Second-quarter revenue decreased 5.8% quarter-on-quarter but increased 7% year-over-year to $1,505 million, a new high for the second quarter. Note that AMKR did not meet expectations for the top line, but this was due to AMKR restarting production later than expected in China, resulting in lower than expected revenue.

See also  Global Blockchain Technology in Healthcare Market Size and Forecast

Margins decreased primarily due to a lower utilization rate as a result of the closure of production facilities in China. However, EPS was unchanged YoY at $0.51, thanks to contributions from non-operating income. EBITDA was $302 million in the second quarter of fiscal 2022, compared to $295 million in the second quarter of fiscal 2021. AMKR ended up with $1.1 billion in cash and short-term investments, offset by $1.1 billion in debt total. The debt to EBITDA ratio was 0.8x. The following table shows the numbers for the second quarter of fiscal year 2022.

(GAAP)

Q2 FY2022

Q1 FY2022

Q2 FY2021

quarterly

YoY

net sales

$1,505 million

$1,597 million

$1,407 million

(5.76%)

6.97%

Gross margin

16.6%

20.4%

19.4%

(380bps)

(280bps)

Operating margin

9.5%

13.2%

11.0%

(370bps)

(150bps)

Operating Income

$143 million

$210 million

$155 million

(31.90%)

(7.74%)

Net income (attributable to AMKR)

$125 million

$171 million

$126 million

(26.10%)

(0.79%)

EPS

$0.51

$0.69

$0.51

(26.09%)

(Non-GAAP)

EBITDA

$302 million

$363 million

$295 million

(16.80%)

2.37%

Source: AMKR Form 8-K

Q2 figures were negatively affected by lockdowns in China, but the outlook shows a return to normalcy. The guidance calls for fiscal 2022 third-quarter revenue of $1.88-1.98 billion, up 14.8% year over year at the midpoint. The forecast calls for GAAP EPS of $0.82-1.02, up 24.3% year over year at the midpoint. Both represent new all-time highs at the midpoint.

(GAAP)

Q3 FY2022 (guidance)

Q3 FY2021

YoY

Income

$1,880-1,980M

$1,681 million

11.84-17.79%

Gross margin

19.0-21.0%

19.3%

(30bps)-170bps

Net income

$200-250 million

$181 million

10.50-38.12%

EPS

$0.82-1.02

$0.74

10.81-37.84%

While AMKR acknowledges reports of weakness in certain segments of the semiconductor market, demand remains healthy, largely thanks to advanced packaging. From the second quarter earnings call:

“Demand for our technology and services remains strong, driven by our leadership position in advanced packaging supporting 5G, automotive, high-performance computing and IoT. Although we see microeconomic headwinds and a weaker market forecast in some segments, we believe the long-term growth engines for the semiconductor industry remain. And we are confident that our strategic focus and leadership position in key semiconductor markets will continue to drive future growth.”

A transcript of the fiscal year 2022 second quarter earnings call can be found here.

AMKR is for sale

Another reason AMKR hasn’t sold as well as other semis has to do with valuations. Unlike other names with sky-high valuations, AMKR is trading at a discount, both to the industry median and to its own 5-year average. For example, current analysts estimate FY2022 EPS of $2.92-3.10 and FY2023 EPS of $3.10-3.30. Therefore, AMKR is trading at 6x forward earnings with a trailing P/E of 7. AMKR is currently trading at significantly lower multiples than it usually does. The 5-year averages are 23x and 15x, respectively. As for the industry median, it is 21x and 22x respectively. AMKR trades at lower valuations than most semis out there.

AMKR

market cap

$4.70 billion

company value

$4.98 billion

Income (“ttm”)

$6,507.3M

EBITDA

$1,408.2M

ending P/E

6.69

Forward P/E

6.27

PEG ratio

0.14

P.S.

0.71

P/B

1.44

EV/sales

0.77

EV/EBITDA mobile

3.54

EV/EBITDA forward

3.27

Source: Seeking Alpha

Investor Conclusions

It’s not easy to stay with semiconductor stocks. Many semis continue to grow strongly, as does the industry as a whole, but there’s no denying that semis have underperformed in 2022, even underperforming other stocks. There have been a number of headwinds that have affected the actions, including the semis. These include a weakening in the global economy, rising inflation, and changes in monetary policy.

The semis have also been negatively affected by sector-specific headwinds. The semiconductor industry is still growing, but it’s also slowing down. Growth will be lower in 2022 than in 2021 and is projected to be even lower in 2023. In addition, more and more companies are issuing weak forecasts.

For example, Samsung is the world leader in terms of monthly wafer releases and has also joined the ranks of companies predicting tough times for the semiconductor industry. All of these reports are dragging down other names in the industry, even if they are doing well themselves. AMKR falls into this category.

AMKR has yet to experience the weakness that has plagued other semis. By contrast, AMKR is expected to post record revenue and profit in its next quarterly report. AMKR may see a deterioration in trading conditions in the coming quarters, but there is little to none of that at this time.

However, AMKR trades as a stock that is bound to experience deterioration at the top and bottom. The valuations at which AMKR trades make that clear. For one thing, AMKR is hitting all-time highs in terms of the top and bottom line with no signs of an impending recession. On the other hand, the stock is trading as if the recession is already here, which is why the stock is available at much lower multiples than it usually is.

I am AMKR bullish as mentioned in a previous article. If someone is looking for a quick payout, then a stock like AMKR is probably not it. The stock is likely to remain volatile as headwinds abound. The semiconductor market is likely to continue to slow due to various headwinds, including a worsening economy in many parts of the world. Longs should prepare for short-term setbacks.

AMKR looks better in the long run. The semiconductor industry is likely to see a correction after the boom of the last few years, but should continue to grow in the long term. Choosing stocks with an eye to the future makes sense from that standpoint, especially if they can be had on sale at a discount. As one of the leading providers of OSAT services, AMKR is well positioned to grow alongside the increasing adoption of advanced packaging in the industry.

The balance is in good shape. The multiples are such that a fairly sizable drop in earnings is already priced in, which could make AMKR a bargain if the drop doesn’t come as expected or is less severe than anticipated. AMKR still has a chance to outdo itself with the help of advanced packages, especially if the recession isn’t as bad as feared. Bottom line, if someone is in this for the long haul, then there is more to like than not to like with AMKR.

See also  Broadview Group hires Andrew Hedrick as chief technology officer

Leave a Comment