ChipMOS Technologies Gouges Itself a Deep Hole

Typically when companies forecast lower sales or profits, their stocks usually take a hit. It's not always easy to tell whether it's having a fire sale or burning down its house. Maybe it is time to get out -- or maybe it's time to buy more!

For chip design testing house ChipMOS Technologies (NASDAQ: IMOS  ) , its recent fourth quarter revenue forecasts are indicative of the overall weakness in the PC market. It said revenue would fall to $167.5 million, down 5.3% from the third quarter, which was a steeper decline than the 5% drop it previously forecast (though it was up 5.6% from the year-ago period). With Himax Technologies and Micron Technology among its top customers, but with the latter being its second-largest customer and also reporting soft sales, it's no surprise ChipMOS would do so as well.

Now don't blindly follow those selling (or buying) on this apparent bearish signal: you still need to do some research. We'll just use the announcement as a jumping off point.

Like lemmings over the cliff
While DRAM testing has been ChipMOS's forte -- generating 30% of its revenue in 2011 -- the LCD market for smartphones, tablet computers, and other flat-panel displays has also grown in importance, accounting for about 22% of its total revenue. Strong tectonic shifts on both fronts look ready to drive the test shop higher.

DRAM and its various iterations are the most common type of memory used in computers today, but it is a cyclical business and the slowdown in PC shipments, coupled with intense competition and uncertainty created by macroeconomic conditions, has the DRAM market facing an inventory glut. With pricing pressured as a result, ChipMOS is constrained in what it can charge for testing. Even as global DRAM shipments continue to rise, the growth rate is slowing, yet Advantest says 2013 represents a year when both DRAM and ChipMOS' other business -- LCD driver ICs and controller chips -- will pull the industry up to new highs.

No longer the boob tube
The smart TV is the next logical advance in the connected living room as PCs, tablets, smartphones, and the television set meld to form a seamless and integrated entertainment hub. According to one analyst at least, the smart TV will account for 37% of all TV sales this year. Although there's no clear standard yet, which makes the transition volatile, the drive toward connectedness will place heavy demand on memory needs. Particularly in the server market, could-based memory will be challenged by the demands placed on it and analysts anticipate that if there's going to be memory growth anywhere, it will be there.

On the go
Mobile computing will continue to expand with Apple dominating the tablet market and Google's Android platform ruling smartphones. Because ChipMOS focuses on liquid-crystal displays, it should see demand rise as vendors work down their inventory surpluses. It's interesting to note that analysts remain worried about Apple's presence in smartphones, and Nomura says weaker-than-expected iPhone 5 sales led it to cut unit estimates by 5% in 2013 and by 8% for 2014.

Still, the rapid increase in mobile devices will help power DRAM shipments in the future, with iSuppli forecasting the combined share of mobile handsets and tablets in the DRAM market to reach almost 27% by the end of this year, almost double the 14% share it marked in the first quarter of 2012.

At less than seven times earnings estimates, ChipMOS certainly looks cheap at these levels, and when a cyclical industry like the chip market is in a funk, it's often the time to strike. Valuations are skewed because of the imbalance, so I think with the forces working in its favor, ChipMOS Technologies looks ready to take off.

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Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On January 17, 2013, at 6:49 PM, phantros wrote:

    I don't know where you got your numbers from, but free cash flow was over $100M last year (and has been for each of the past 3 years, which is how net debt has decreased by half a billion) giving an enterprise value to free cash flow of around 3.5 not 27.

    As you said, DRAM is expected to recover. Not only have DRAM spot prices gone up by about 30% in the past month and a half, but Micron will soon be getting the chips from Inotera (a joint venture it is now assuming control of), Elpida (from the impending merger), and Rexchip. That is one example of where growth will come from.

  • Report this Comment On January 19, 2013, at 8:33 AM, factchkr wrote:

    Author's IMOS' free cash flow reference is faulty, it's been $3.00/share consistently.

    When will author correct this mistake? (and author or editors consider changing the deceptively negative headline as well?)

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