Amkor Technology: There Is More To Like Than Not To Like

Amkor Know-how (NASDAQ:AMKR) has seen a lot of volatility recently. The inventory is getting dragged round by forces that maintain opposing views. On the one hand, the inventory is dealing with downward stress from the notion that semiconductor demand is getting weaker, particularly with current downgrades in earnings outlooks from trade heavyweights. Then again, the inventory is benefiting from buying and selling at low valuations and powerful steering with AMKR doing a great job managing the varied headwinds on the market, partly with the help of rising trade curiosity in superior packaging. There may be nonetheless a case to be made in favor of lengthy AMKR. Why can be lined subsequent.

AMKR is getting bounced round

AMKR has seen its inventory drop this yr, just like most corporations on the market. Nonetheless, it’s price mentioning that AMKR has achieved higher than most semis on this regard. As an illustration, the iShares PHLX Semiconductor ETF (SOXX) has misplaced 33% YTD. As compared, AMKR has misplaced 24% YTD. AMKR has outperformed in that sense.

Nonetheless, the inventory has been very unstable recently. The inventory misplaced about 25% in June, solely to realize all of it again after which some with an nearly 50% acquire in July. Nonetheless, the inventory has reversed course and it’s now heading decrease as soon as extra. The inventory has misplaced shut to twenty% since early August. All this occurred within the span of about three months as proven within the chart beneath.

The inventory is bouncing round, held hostage to altering headlines. As an illustration, the inventory suffered when COVID-19 lockdowns had been imposed in China, one thing that may make its method again to AMKR’s earnings experiences. The inventory rebounded with the lifting of the restrictions, giving AMKR an opportunity to return enterprise actions to regular and an enchancment in quarterly outcomes.

Nonetheless, the latest decline within the inventory coincided with weak forecasts from industry heavyweights like Micron (MU) and Nvidia (NVDA). Each cited weakening chip demand as justification for decreasing their earnings outlook. The double whammy precipitated semis to dump, AMKR included.

The assumption is that lowered demand for semiconductors will lead to lowered demand for OSAT companies from the likes of AMKR. Then again, it’s price mentioning that whereas it’s admittedly more durable, particular person names can nonetheless prosper in an atmosphere the place general demand for semiconductors is down. Not all corporations depend on OSAT companies in any case. Some corporations depend on their very own in-house take a look at and packaging for his or her merchandise.

As an illustration, a shift in shopper demand in direction of merchandise from fabless designers using OSAT companies and away from IDMs that rely on insourcing might create further enterprise alternatives for a corporation like AMKR. That is the place one thing like superior packaging might are available in and make a distinction. AMKR can create added worth to entice clients to make the swap with a view to profit. AMKR just isn’t essentially doomed if or when a downturn arrives. It relies on how extreme circumstances get, assuming they even get there within the first place.

Earnings progress is holding up at AMKR

A part of the rationale why AMKR has not offered off as a lot as among the different semiconductor names out there’s as a result of AMKR has but to report a major deterioration in its earnings outlook just like the semis talked about earlier. Quite the opposite, progress is anticipated to choose up. The lifting of restrictions in China and a return to regular output ranges in Q3 helps on this regard.

Nonetheless, the numbers in Q2 did take a success from lockdowns in China. Q2 income declined by 5.8% QoQ, nevertheless it elevated by 7% YoY to $1,505M, a brand new excessive for the second quarter. Be aware that AMKR missed expectations for the highest line, however this was resulting from AMKR resuming manufacturing later than anticipated in China, leading to income that was lower than anticipated.

Margins declined largely resulting from a decrease utilization fee on account of manufacturing services being shut down in China. However, EPS remained unchanged YoY at $0.51, due to contributions from non-operating revenue. EBITDA was $302M in Q2 FY2022, up from $295M in Q2 FY2021. AMKR completed with $1.1B in money and short-term investments, offset by $1.1B in complete debt. The ratio of debt to EBITDA was 0.8x. The desk beneath reveals the numbers from Q2 FY2022.

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Supply: AMKR Form 8-K

The Q2 numbers had been negatively impacted by lockdowns in China, however the outlook sees a return to regular. Steering requires Q3 FY2022 income of $1,880-1,980M, a rise of 14.8% YoY on the midpoint. The forecast expects GAAP EPS of $0.82-1.02, a rise of 24.3% YoY on the midpoint. Each signify new all-time highs on the midpoint.

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Whereas AMKR acknowledges the experiences of weak spot in sure segments of the semiconductor market, demand stays wholesome, thanks largely to superior packaging. From the Q2 earnings name:

“Demand for our expertise and companies stays strong, pushed by our management place in superior packaging supporting 5G, automotive, excessive efficiency computing and IoT. Though, we observe microeconomic headwinds and a few weaker market forecast in some segments, we consider the long-term progress drivers for the semiconductor trade stay in place. And now we have assured our strategic focus and management place in key semiconductor markets will proceed to drive future progress.”

A transcript of the Q2 FY2022 earnings name will be discovered here.

AMKR is on sale

Another excuse why AMKR has not offered off as a lot as different semis has to do with valuations. Not like different names with valuations which can be up within the skies, AMKR trades at a reduction, whether or not compared to the sector median and to its personal 5-year common. As an illustration, present analyst estimates challenge FY2022 EPS of $2.92-3.10 and FY2023 EPS of $3.10-3.30. AMKR thus trades at 6 instances ahead earnings with a trailing P/E of seven. AMKR is at the moment buying and selling at considerably decrease multiples than it normally does. The 5-year averages are 23x and 15x respectively. When it comes to the sector median, it’s 21x and 22x respectively. AMKR trades at decrease valuations than most semis on the market.

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Supply: SeekingAlpha

Investor takeaways

It’s not straightforward sticking with semiconductor shares. Many semis are nonetheless rising robust, as is the trade as an entire, however there’s no denying that semis have achieved poorly in 2022, even underperforming towards different shares. A variety of headwinds have popped up which have weighed on shares, semis included. These embrace a weakening within the international economic system, rising inflation and modifications in financial coverage.

Semis have additionally been negatively impacted by headwinds particular to the sector. The semiconductor trade remains to be rising, however additionally it is slowing down. Development can be much less in 2022 than it was in 2021 and it’s projected to be even much less in 2023. As well as, an increasing number of corporations are issuing weak forecasts.

As an illustration, Samsung is the worldwide chief by way of month-to-month wafer begins and it too joined the ranks of corporations predicting tough times for the semiconductor trade. All these experiences are dragging down different names within the trade, even when they themselves are doing superb. AMKR falls into this class.

AMKR has but to expertise the weak spot that has affected different semis. Quite the opposite, AMKR is anticipated to publish file income and earnings in its subsequent quarterly report. It’s attainable AMKR might even see a deterioration in enterprise circumstances in upcoming quarters, however there’s little if any of it in the intervening time.

Nonetheless, AMKR trades like a inventory that’s destined to expertise a deterioration within the high and the underside line. The valuations AMKR trades at makes this clear. On the one hand, AMKR is reaching file highs by way of the highest and the underside line with no indicators of an imminent downturn. Then again, the inventory is buying and selling just like the downturn is already right here, which is why the inventory is on the market at a lot decrease multiples than it normally goes for.

I’m bullish AMKR as talked about in a previous article. If anybody is in search of a fast payoff, then a inventory like AMKR might be not it. The inventory is more likely to stay unstable as headwinds abound. The semiconductor market is more likely to maintain slowing down resulting from numerous headwinds, together with a worsening economic system in lots of elements of the world. Longs ought to brace themselves for short-term setbacks.

AMKR seems higher for the long run. The semiconductor trade might be due for a correction after the increase lately, nevertheless it ought to proceed to develop in the long term. Choosing shares with an eye fixed in direction of the longer term is smart from that standpoint, particularly if they are often obtained on sale at a reduction. As one of many main suppliers of OSAT companies, AMKR is nicely positioned to develop together with rising adoption of superior packaging within the trade.

The steadiness sheet is in fine condition. Multiples are such {that a} pretty sizable downturn in earnings is already priced in, which might make AMKR a discount if the downturn doesn’t arrive as anticipated or is much less extreme than anticipated. AMKR nonetheless has a shot at outperforming with the help of superior packaging, particularly if the downturn just isn’t as unhealthy as feared. Backside line, if somebody is in it for the lengthy haul, then there’s extra to love than to not like with AMKR.