The semiconductor industry has been red-hot over the last few years, and it isn't just Nvidia and Advanced Micro Devices delivering substantial gains for investors. The digital economy is forever expanding, and more products and services require advanced chip hardware, which is creating pockets of opportunity for a number of companies.
Axcelis Technologies (ACLS 3.09%) is one of them. Shares of the semiconductor service company have rocketed higher by more than 440% over the last five years, even after accounting for the recent 36% decline from its all-time high.
Axcelis just reported its financial results for the 2023 full year, and it delivered record sales and earnings. Investors were disappointed by the company's forward guidance, but its stock has now fallen so far that it's trading at an absolute bargain valuation. Here's why it might be time to buy.
NASDAQ: ACLS
Key Data Points
Axcelis is critical 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 doesn't make chips, it makes ion implantation equipment that is critical to the fabrication process. Demand for chips continues to grow, so producers are expanding their manufacturing capacity and that requires more hardware from Axcelis.
In fact, the company is carrying a $1.2 billion order backlog right now, which is near a record high.
Axcelis' record year was driven by the power devices market. Power 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. EVs are an enormous source of demand, especially when it comes to silicon carbide chemistries, which allow for lighter and more energy-efficient power devices. Axcelis is a specialist in that area.
The company expects the strong demand for EVs to continue, especially in China. But it's also bracing for a comeback in mature process markets like computer processors and memory (DRAM) and storage (NAND) chips. These have been weak since 2022 because the industry overproduced following the pandemic-driven supply chain disruptions, leading to a supply glut that suppressed prices.
Axcelis believes artificial intelligence (AI) could be a driver of the comeback. Senior Executive Doug Lawson said AI-enabled personal computers, for example, require significantly more DRAM than traditional computers, which means manufacturers will have to expand 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 the worst of the inventory and pricing problems are already over.
In other words, those segments might bounce back faster than expected.
Axcelis delivered record revenue and earnings in 2023
Axcelis delivered a record-high $1.13 billion in revenue during 2023, representing 23% year-over-year growth. The result topped the company's latest forecast, which it raised twice throughout the year because it routinely beat its expectations each quarter.
That translated to $7.43 in earnings per share (profit), which was also a record high. That number grew by 36% compared to 2022, and careful expense management played a role in the strong result. Axcelis' operating costs only increased by 19% year over year, which was slower than its revenue growth, so more money flowed to the bottom line as profit.
The company's forward guidance was a concern for investors. Management is forecasting $242 million in revenue for the first quarter of 2024, which would be a 5% year-over-year decline. Full-year revenue is expected to come in at a similar level to 2023, which suggests there possibly won't be sales growth at all this year.
However, the company did forecast $1.3 billion in revenue for 2025, so while it might take a breather this year, the growth story certainly isn't over.
Image source: Getty Images.
Axcelis stock is dirt cheap compared to the rest of the semiconductor industry
As I touched on earlier, Axcelis stock had a massive run over the last five years despite currently trading 36% below its all-time high. It's possible the decline has gone too far.
Based on the company's $7.43 in earnings per share last year and its current stock price of $122.25, it trades at a price-to-earnings (P/E) ratio of just 16.5. That's extremely cheap compared to the iShares Semiconductor ETF which trades at a P/E ratio of 33.4 -- and Axcelis is in that ETF, by the way.
In other words, Axcelis stock would have to more than double just to trade in line with its peers in the semiconductor industry. The stock is also cheap compared to the benchmark S&P 500 index (P/E ratio of 22.1) and the Nasdaq-100 technology index (P/E ratio of 30.9).
Despite its weak forward guidance, Axcelis has a track record of beating its forecasts and it's still carrying a $1.2 billion order backlog, which is close to a record high. If the company does see a larger-than-expected upswing in the market for processors, memory, and storage chips this year, that could drive an upside surprise to its financial results.
Even if 2024 is a flat year for Axcelis, investors willing to hold the stock into 2025 and beyond will likely do well if they buy in at its bargain-basement price right now.
