Axcelis Technologies (ACLS 1.48%)just reported impressive Q2 earnings with net income up 134% and gross profit up 55% year over year. A maker of equipment used in the fabrication of microchips, Axcelis serves as a unique ancillary provider to the semiconductor industry. As long as chip demand remains high, and consumer electronics aren't impacted by a trade war, Axcelis could be a solid investment for the remainder of 2022 and beyond.
Helping chipmakers make chips
Axcelis Technologies designs, manufactures, and services proprietary equipment used to make semiconductor chips for industries ranging from kitchen appliances to cars. The Massachusetts-based company assists chipmakers with their fabrication processes -- aspects such as contamination control, temperature control, and defect reduction.
The EV market has contributed significantly to Axcelis' success thus far. As CEO Mary Puma describes it, the "electrification of the automotive industry" has driven significant growth for the business, as EV cars require many more microchips than fossil-fuel-powered vehicles do. For example, while a gas-powered Ford Focus has about 300 chips, the electric Ford Mustang Mach-e contains nearly 3,000.
A challenging supply chain environment
Although semiconductor demand doesn't appear to be dwindling at the moment, Axcelis does face some static on the road ahead. During the company's last earnings call, Puma described how increased supply chain and logistics costs have hurt the company's gross margin.
Indeed, although gross margins in Q2 were 44.8% and well above company guidance, gross margin expectations for Q3 are only 42%. According to Axcelis' CFO Kevin Brewer, supply chain-related costs are partially to blame for the smaller margin. Still, that 42% figure is at the high end of the company's historical range of gross margins, and equal to or greater than any full-year gross margin the company's posted since 2020.
Another factor to consider is deteriorating U.S. and China relations. The two countries are the world's largest chip consumer markets, and any major interruptions in commerce would be a blow to the semiconductor industry as a whole. Axcelis could be disproportionately impacted by a trade war with China, since 55% of its shipments in Q2 sailed to China. U.S. business accounted for only 16% of shipments, followed by Korea, Europe, and Taiwan.
Axcelis remains optimistic long-term
Despite near-term headwinds, Axcelis has continued to exceed expectations. Total revenue in Q2 was over $221 million, up 50% year over year. Management anticipates revenue to be greater than $875 million in 2022. Considering total revenue in 2021 was $662 million, hitting $875 million would mark a 32% yearly increase in revenue.
And Axcelis forecasts a bright future beyond this year. According to Puma, "significant" orders for 2023 have already been booked, and she feels that the switch to electric vehicles will benefit the company for "many years to come." Regarding the supply chain and logistics headwinds, CFO Brewer believes the company should start seeing recovery sometime in 2023.
The supply chain problem could actually be a boon to consumer demand over time, since a supply limited environment can prevent a rapid slowdown in sales. If the company can stay on course and meet management's expected revenue for 2022, semiconductor stock investors could soon consider Axcelis Technologies a future blue "chip" stock.
