Where Will Axcelis Technologies Be in 1 Year?

Axcelis Technologies (ACLS 0.85%), a producer of ion implant equipment for the manufacturing of semiconductors, has gained a lot of attention over the past few years for its growth potential in the silicon carbide and electric vehicle markets. However, its stock has declined nearly 20% this year as those two growth engines cool off.

Does that pullback represent a good buying opportunity for patient investors? Let's review its business model, growth rates, and valuations to see where its stock might be headed over the next 12 months.

Image source: Getty Images.

What does Axcelis Technologies do?

Axcelis' ion implantation systems are used to implant the ions of one element into another material. All semiconductors are produced with silicon, but Axcelis' systems can implant carbon ions into silicon to produce silicon carbide (SiC), a material that can operate at higher voltages, temperatures, and frequencies than traditional silicon chips.

That resilience makes SiC chips good for short-length LEDs, lasers, 5G base stations, military radars, and electric vehicles. Most of the SiC market's recent growth has been driven by electric vehicles, but many EV makers have struggled with high interest rates, supply chain problems, and other macro headwinds over the past year.

In 2023, Axcelis generated 34% of its total system revenue from the SiC market. The rest came from systems for DRAM and NAND chips, image sensors, and other types of silicon chips. It relied on China for 46% of its total system revenue.

How fast is Axcelis growing?

From 2020 to 2023, Axcelis' revenue grew at a compound annual growth rate (CAGR) of 33.5% as its earnings per share (EPS) rose at a CAGR of 72%. It profited from the expansion of the SiC market, the memory chip market's cyclical recovery, and the growth of the 5G, data analytics, and artificial intelligence (AI) markets.

But over the past year, its growth decelerated as the EV market cooled off, the memory chip market suffered a cyclical slowdown, and it faced macro headwinds in China. Its revenue rose 23% in 2023, compared to its 39% growth in 2022.

Data source: Axcelis Technologies. YOY = Year-over-year.

Axcelis expects that pressure to persist with nearly flat revenue growth in 2024. Analysts expect its revenue to dip 1% in 2024 but rise 12% in 2025 as the macro environment warms up, the weak NAND market finally rebounds, and the EV industry stabilizes. It expects some of those tailwinds to kick in during the second half of 2024.

Its gross margins still improved in 2023 as it reduced its costs of goods sold, and it expects its annual gross margin to expand in 2024. Its EPS also consistently rose by double digits as it repurchased $52.5 million in shares in 2023.

Axcelis' EPS rose 36% in 2023, compared to its 90% growth in 2022, but analysts are bracing for an 8% decline in 2024. But looking further ahead, they expect 24% earnings growth in 2025 as its revenue rises again.

Where will Axcelis' stock be in a year?

At $104, just 15 times this year's earnings, Axcelis' stock looks cheap. It also seems like a better diversified play on the long-term growth of the SiC market than dedicated SiC chipmakers like Wolfspeed (WOLF 5.64%), which faced a much tougher slowdown over the past year and remains unprofitable on the basis of generally accepted accounting principles (GAAP).

Axcelis' stock might stay in the penalty box until more green shoots appear, but I believe it could head higher over the next 12 months as investors focus on its niche strengths, its cyclical recovery, and the explosive growth potential of the SiC industry -- which could still expand at a CAGR of 32.6% from 2024 to 2029, according to Markets and Markets.