The semiconductor industry has had a bumper year as demand soars for the advanced computer chips that power many consumer products from smartphones to cars.
Producers have struggled to keep up as pandemic-related shutdowns halted manufacturing for portions of 2020 and 2021. It has led to rising profit margins across the industry, as companies operate at maximum capacity and increase prices.
The iShares Semiconductor ETF (SOXX +0.34%) is a bellwether for the sector's performance, as it holds shares in many of the world's top producers. It has risen by 38% so far this year, but that pales in comparison to Axcelis Technologies (ACLS 2.24%), which is up 117%.
Here's why the $2 billion semiconductor-service specialist has outperformed.
Image source: Getty Images.
Driven by the automotive segment
Axcelis isn't a typical semiconductor manufacturer. It instead makes ion implantation equipment used in the fabrication of advanced chips -- something that's highly sought after by top producers.
Of all the industries affected by semiconductor supply shortages this year, the automotive sector is arguably the hardest hit. New cars are becoming more intelligent with a growing list of digital features, so their appetite for advanced computing power is continually increasing. Some new car dealerships have seen their inventory collapse as much as 80% as they wait for manufacturers to build more supply.
It has led to skyrocketing prices in the new car market, but even more so in the used car market, as consumers are choosing to purchase pre-owned vehicles rather than wait lengthy amounts of time for delivery of a new car.
The equipment made by Axcelis allows semiconductor producers to expand their capacity to make more chips, and they're doing so at a rapid pace if the company's performance is anything to go by. In September, Axcelis announced that it shipped a full family of its Purion Power Series implanters to chipmakers located across Asia and Europe and that they will specifically be used in the high-volume production of automotive-related chips.
But with shortages expected to continue into 2022, Axcelis is presented with a growing opportunity.
Accelerating financial performance
In the third-quarter earnings report last week, Axcelis raised its full-year 2021 revenue guidance to indicate it would exceed $640 million. It had previously expected about $625 million, but the record $126.2 million in implanter systems revenue in Q3 prompted the upward revision.
|
Metric |
2019 |
2021 (Estimate) |
CAGR |
|---|---|---|---|
|
Revenue |
$342 million |
$640 million |
36% |
|
Earnings per share |
$0.50 |
$2.68 |
131% |
Data source: Axcelis Technologies, Yahoo! Finance. CAGR = compound annual growth rate.
But as touched on earlier, the semiconductor industry is experiencing a profitability boom on the back of strong demand and rising prices. Axcelis is no exception, and it is set to grow its earnings per share by over 400% since 2019 if it meets analysts' expectations this year.
But the company has long-term, sustainable growth in its sights according to its CEO, and it seems analysts agree. They're forecasting $3.48 in earnings per share in 2022, signaling another 30% growth on top of the incredibly strong 2021 expected result.
Why Axcelis doubled, and why it's still a buy
Based on $2.68 in 2021 earnings per share and a current stock price of $63, Axcelis trades at a forward price-to-earnings multiple of 23. By comparison, the iShares Semiconductor ETF trades at a multiple of 35 times, so Axcelis is technically still 32% cheaper than a basket of its peers.
Now, if you consider that just 10 months ago the stock was trading at less than half the current price of $63, it's plain to see why it has doubled -- and it could still have significant room to run if it's to reach a market valuation more aligned with the rest of the semiconductor industry.
With the world's largest car manufacturers predicting that supply shortages will flow through into the new year, major semiconductor producers might have no choice but to continue expanding their capacity. That means the demand for Axcelis' equipment should rage on, and that's great news for shareholders.
There aren't many semiconductor stocks that look cheap right now, but Axcelis certainly does.
