Semiconductor stocks have sold off nearly double the amount of the overall market this year, because of fears over a cyclical slowdown, as well as the cutting off of certain chip sales to China.
Yet recent restrictions on China sales just go to show how important next-gen semiconductors are to the economy. And despite the cyclical downturn, the long-term growth in cloud, artificial intelligence, 5G, electric and autonomous vehicles, and the Internet of Things will all require more advanced chips over the long term.
Within those trends, certain chip production processes are also growing in importance, such as advanced packaging. And a leader in the most cutting-edge advanced packaging tools is Netherlands-based BE Semiconductor N.V. (BESIY +1.50%), also known as "BESI" for short. Here's why this under-the-radar company should be on your shopping list.
OTC: BESIY
Key Data Points
Why advanced packaging could rule the next decade
Over the past decade, wafer-front-end equipment sales saw a boom, as the adoption of extreme ultraviolet lithography (EUV) allowed chipmakers to economically produce chips with transistors below 10nm apart. However, in the 2020s, narrowing the distance between transistors is becoming harder and more expensive, as device scaling rubs up against the boundaries of physics.
Enter advanced packaging, by which chipmakers are now improving a system's power, performance, and functionality through attaching chips together in new, innovative ways, rather than merely shrinking transistor sizes.
In fact, the newest processors by both Intel (INTC 0.07%) and Advanced Micro Devices (AMD 0.03%) both employ a new kind of "chiplet" architecture. This is a process by which different parts of the processor are actually made separately and optimized for performance, then stitched together through new advanced packaging techniques to create the new chip. The efficiencies gained by optimizing each part of the processor can lead to improved performance again beyond the mere shrinking of transistors.
Don't sleep on BE Semiconductor
The global leader in the most sophisticated types of advanced packaging is BE Semiconductor. Although BESI has 12% market share of the overall assembly and packaging industry, it has a leading 42% share in the die attach potion of the market, and a 75% market share within the most advanced technologies for die placement.
BESI's concentration in the most advanced parts of the packaging industry positions it well for the future. For instance, AMD's EPYC data center chips have gone from four chip placement steps in 2017, to nine advanced placement steps in 2019, to more 30 advanced placement steps in the most recent 2022 model. Intel's upcoming Ponte Vecchio GPU is composed of 47 chiplets, stitched together.
Advanced solutions are leading to industry-leading margins
The concentration in the high-end parts of the packaging and die attach markets have enabled BESI to achieve sustainably higher margins than rivals, all while continuing to expand margins over the cycles. Over the past 15 years, BESI's gross margins have improved from roughly a 34% through-cycle gross margin in the 2006-2009 timeframe to a 58% gross margin over the past four years.
Remarkably, BESI continues to improve its margin profile. Even though the most recent quarter saw a decline in revenues off record highs due to both cyclical and seasonal factors, gross margins have actually improved to 62.3% versus 61% in the second quarter. While net margins came down slightly, as the company maintained its investment in research and development, they were still a very high 34%, even in a "down" quarter.
With those profits, BESI opts more for high dividend payments, rather than the share repurchases favored by its American counterparts. In fact, BESI pays out virtually all of its net profits in dividend payments, which fluctuate from year to year, depending on cyclical dynamics. While BESI does do some share repurchases, they are relatively lower, meant only to offset the dilution of stock-based compensation as well as the dilution from its low-rate convertible debt.
This year, the company paid out a 3.33-euro dividend based on 2021's net profits of 3.39 euros per share, good for about a 6.8% dividend yield at the current share price. The first half of 2022 was strong for BESI, but the back half is likely to be significantly lower, so the dividend may come out slightly lower this year. Through the first nine months of 2022, BESI earned 2.40 euros per share, slightly below the 2.58 earnings through the first nine months of 2021.
BESI could be a good option for semiconductor investors
Earnings may decline in the year ahead, but that is largely expected and reflected in BESI's current share price, at least to some extent. But if the scaling of advanced semiconductors continues to grow over the long term, investors should benefit handsomely. Currently, Wall Street analysts agree the stock is undervalued, with an average price target of 71.44 euros, good for a 46% gain over today's price. The highest price target is a whopping 110 euros, which would equate to a 125% gain from here.
BE Semiconductor may be somewhat off the radar for U.S. investors because of its European headquarters, but for dividend-oriented investors who believe in the long-term growth of advanced semiconductors, BESI should be on your "buy" list, especially with shares down 45% from their 52-week highs.
