Investors in the technology-centric Nasdaq-100 index are feeling the pinch right now, as the market has officially entered into bear territory. Bear markets are technically defined by a decline in value of 20% or more, and the Nasdaq-100 is down more than 26% from an all-time high hit in November 2021.
Many individual stocks are down significantly more than that, but it's not all bad news. The semiconductor sector has been surprisingly strong recently thanks to the digitization of more products and services, and semiconductor-related equipment manufacturer Axcelis Technologies (ACLS 1.27%) just delivered a blockbuster earnings result for the first quarter of 2022.
The company expects further semiconductor manufacturing growth from companies dealing with 5G networks, big data centers, and electric vehicles. Here's why this stock is a buy amid the broader market carnage.
A critical part of the production machine
Unlike some of the high-flying, popular semiconductor stocks like Nvidia or Advanced Micro Devices, Axcelis Technologies doesn't produce any chips itself. Instead, it sells ion implantation equipment critical in the production process to the world's largest manufacturers.
Over the last six months, Axcelis has made a string of announcements to the market to inform investors about high-profile shipments of its equipment to semiconductor makers. One note on April 14 highlighted follow-on orders from an existing customer in addition to the acquisition of a new buyer, both of which operate in the fast-growing DRAM (memory chips) space. That was followed up on April 28 with more shipments to different DRAM suppliers in Asia.
This is becoming an increasingly important segment of the semiconductor industry, as one of the world's leading producers of memory chips, Micron Technology, describes electric vehicles as data centers on wheels. It anticipates over 100 new electric vehicle models will launch worldwide in 2022 alone, which is likely to trigger a demand surge for chips.
It's consistent with the expectations of Axcelis CEO Mary Puma, who cited the electrification of the automotive industry as a key driver behind the company's record-high order backlog at the moment. As electric vehicles trend toward becoming the majority of new car sales by 2050, there's potential for an extreme-long term growth story at Axcelis, especially when paired with other advanced technologies like the global rollout of 5G.
A blowout first quarter of 2022
While many other high-growth companies are experiencing a slowdown in revenue generation amid the tightening economic conditions, Axcelis is still posting powerful growth. It delivered $203 million in first-quarter sales, a 53% increase year over year.
But the real story lies in the company's profitability, with earnings per share soaring by triple digits in the quarter.
When a company has a backlog of orders, as Axcelis does to the tune of $625 million, it often gives it pricing power. It's evident in Axcelis' gross profit margin, which expanded to 44.1% in Q1 from 42.5% in the year-ago quarter. The result is a strong net income, and the company's strength looks set to carry through to the rest of 2022.
It's not over
Axcelis has provided revenue guidance to the market that suggests it could generate $850 million for the current full year. That would represent 28% growth compared to the $662 million it delivered in 2021.
On the earnings-per-share side, analysts estimate Axcelis will generate $4.35 in 2022, a solid 51% jump compared to 2021. It would place the company's stock at a forward price-to-earnings multiple of 12.6, a discount of 44% to the Nasdaq 100 index, which trades at a forward multiple of 22.8. It means Axcelis stock would have to soar 80% just to trade in line with the broader tech sector.
In the face of an incredibly weak stock market right now, it might be worth owning shares in a company that's poised for one of its biggest years yet -- especially at its current price, which appears to be a bargain.