For investors who have been in the game for a while, the term "when everyone digs for gold -- sell shovels" is often metaphorical for a great potential opportunity. There is currently a global supply shortage of semiconductors -- the chips used in high-powered computers and cars -- leaving producers scrambling to expand capacity. Axcelis Technologies (ACLS +1.02%) provides manufacturing equipment to the companies that make semiconductors, and it's quietly growing at a rapid pace.
The COVID-19 pandemic triggered supply chain disruptions, and the work-from-home economy drove huge demand for computer equipment, generating a perfect storm in the chips space. Compounding the issue, government stimulus has armed consumers with record levels of savings, pushing up demand for big-ticket purchases like cars -- which are now more reliant than ever on semiconductors.
Image source: Getty Images.
An essential part of the machine
According to the Semiconductor Industry Association, global sales for semiconductor chips totaled $439 billion in 2020, and they're expected to grow further this year. That growth might be hindered by a supply shortage that has recently been described as a crisis by some analysts.
A rise in car prices accounted for a third of the rise in inflation in the month of May -- driven by new vehicle shortages, caused almost entirely by a lack of supply of semiconductors. For some dealerships, inventories are down as much as 80%, giving consumers little choice but to explore the used car market, which is pushing prices up there, too. As advanced computer chips power more of our daily lives, the shortage is clearly having reverberating effects.
In the 2020 annual report, Axcelis flagged its continued focus on the "power device" line, like the launch of its Purion H200 high current implanter -- which is specifically designed for the semiconductors used for automotive purposes. Ultimately, the company is well placed for continued growth if it continues to innovate in this area.
Strong growth in financial metrics
Despite the pandemic placing strain on most businesses around the world, Axcelis was one of the unique companies that thrived. It generated 38.3% growth in revenue for the full year 2020, and almost tripled its earnings per share.
While Axcelis manufactures its components in the U.S., over 89% of its revenue is derived from offshore customers. Asia comprises the lion's share of the company's international sales, which is typical since 60% of the world's semiconductor production is based in the Asia-Pacific region.
|
Metric |
2019 |
2020 |
Q1 2021 |
Full-Year 2021* |
|---|---|---|---|---|
|
Revenue |
$342.9 million |
$474.5 million |
$132.7 million |
$557.0 million |
|
Earnings per share |
$0.50 |
$1.46 |
$0.48 |
$1.95 |
Note: Full-year 2021 are projected figures. Data sources: Axcelis Technologies, Yahoo! Finance.
Revenue growth carried through to the first quarter of 2021, albeit at a slower pace, with 11.5% growth year over year. The $132.7 million figure puts the company on track to do over $500 million for the current full year, in line with projections.
Perhaps more significant, the company delivered a 45% year-over-year boost to earnings per share in Q1. It's now on track to generate almost $2 per share in 2021.
Looking forward
With trailing-12-month earnings per share of $1.52 and a share price of $41, Axcelis trades at a multiple of about 27 times. If it meets analyst expectations in 2021 and earns $1.95, the share price would need to rise to $52.65 to maintain the same multiple. That's about 28% upside from here.
The company doesn't have a flashy brand or a sizzling consumer demand for its products, like the semiconductor manufacturers it supplies. Therefore, it appears the market has attributed a more conservative valuation compared to those highfliers, some of which trade at multiples as high as 80 times earnings. Nevertheless, Axcelis serves as an essential part of the production process, and many companies wouldn't be able to deliver chips without its technology.
Strong earnings growth is also expected in 2022, so this could be a value play that continues for as long as the semiconductor shortage persists. But given our growing appetite for more advanced chips, Axcelis has a major opportunity to grow into an industry powerhouse.
