By Anthony Di Pizio, The Motley Fool,Trades Of The Day, 2024-08-09
The S&P 500 had a dream run in the first half of this year, gaining over 15% with practically no volatility. However, a correction was inevitable because history tells us that markets don't rise in a straight line. As a result, the index hit a wall in mid-July and has since declined by almost 6%.
The information technology sector of the S&P 500 is leading the drop, with a 12.8% loss in the last four weeks. It includes stocks like Amazon and Nvidia, which are down 14% and 20%, respectively. But this could be a great opportunity for long-term investors to buy stocks at a discount.
Axcelis Technologies (ACLS) is one tech stock in the semiconductor industry with significant potential for strong returns in the coming years. It's down 31% since July and substantially cheaper than its peers, based on one widely used valuation metric. Let's take a closer look at where its business is headed.
A critical supplier to the AI industry
Axcelis doesn't produce any chips but manufactures ion implantation equipment, which is critical to the fabrication of everything from CPU processors to memory (DRAM) chips to power devices (which regulate electric power in high-current applications).
During the second quarter of 2024 (ended June 30), the company continued to experience strong demand from power-device manufacturers in the electric-vehicle (EV) industry, particularly those using silicon carbide chemistry because it enables faster battery charging and more miles per charge.
Data centers for artificial intelligence (AI) development present a new opportunity in that space because of their substantial energy requirements. Some of Axcelis' customers have just announced silicon carbide-based trench MOSFET (metal oxide semiconductor field effect transistor) power devices for AI data centers. That technology requires a high implant intensity, so this could be a valuable market for the company.
AI is set to be a significant opportunity for Axcelis in multiple segments. For example, AI software demands more capacity from memory chips in the data center, as well as in consumer devices, like computers and smartphones. That calls for more manufacturing capacity, which organically boosts demand for ion implantation equipment.
Gearing up for a strong 2025
Axcelis generated $256.5 million in revenue during the second quarter of 2024, which represented a 6.3% drop from the year-ago period. However, the result was significantly above management's forecast of $245 million, so the revenue decline wasn't as severe as expected.
2023 was the strongest year in Axcelis' history, with record revenue and earnings, so it was always going to be tough to beat. Revenue is expected to come in at slightly above $1 billion this year, which will be a slight decline, compared to 2023. However, the company anticipates potential growth of 24% in 2025, taking revenue to a record $1.3 billion.
It's important to note the company has an order backlog worth a whopping $1 billion right now, and that number is expected to grow, so there's plenty of demand in the pipeline. Plus, the silicon carbide device market is expected to grow at a compound annual rate of 25% until at least 2029 thanks to demand for EVs and AI data centers. Ion implantation is one of the most critical steps in the fabrication of those devices, and Axcelis is the leading supplier of equipment.
Additionally, Axcelis expects manufacturers of memory chips to begin adding capacity at the end of 2024 and into 2025, which spells more equipment sales. The company has already started building inventory, so it's ready to fill that demand when it hits.
Axcelis stock is incredibly cheap
The company continues to deliver robust profits, thanks to careful cost management and an elevated gross margin. The company generated $1.55 in earnings per share during Q2, which was far above management's forecast of $1.30. That takes Axcelis' trailing-12-month earnings per share to $7.26.
This places Axcelis stock at a price-to-earnings (P/E) ratio of just 14.3, which is a whopping 59% discount to the 34.8 P/E ratio of the iShares Semiconductor ETF. That implies Axcelis is heavily undervalued relative to its peers in the industry, but to be clear, companies that aren't generating growth will typically see their valuations suppressed by investors.
That makes Axcelis a “show me” story. In other words, the company will have to prove it can return to growth in 2025 before investors feel confident enough to buy the stock and reverse some of its recent decline. However, if that actually happens, investors who buy it today could yield significant returns.
— Anthony Di Pizio
Source: The Motley Fool
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