Photronics (PLAB 0.91%), a tech company involved in making microchips and flat-panel displays (FPDs), beat earnings-per-share estimates in its earnings release late last month -- and also posted its sixth straight quarter of record revenue.
But this semiconductor stock has plummeted more than 38% from the 52-week high it reached last month. Why did the stock drop, and what can investors expect moving forward?
The only pure-play photomask company in the U.S.
Photronics is the world's largest manufacturer of photomasks, photographic quartz plates used to make miniature electronic circuits. Known primarily for their use in semiconductors, photomasks are used in a range of high-tech products, including mobile devices, TVs, PCs, and FPDs.
The self-proclaimed "only pure-play photomask company in the U.S.," Photronics offers unique exposure to a global market. In fact, more than half the company's revenue comes from products produced and sold in Asia. Supporting a truly global customer base, Photronics operates out of 11 facilities strategically located across the world.
The company has seen growth recently, particularly in the mobile display and integrated circuit (IC) sectors. IC revenue surged 37% year over year in its fiscal 2022 third quarter (ended July 31), and FPD revenue rose 11% to $58.7 million.
Strong demand and improved pricing led the company's growth across both its high-end and mainstream markets. Tiny and ubiquitous, semiconductors can now be found in countless products. Photronics continues to adapt and innovate with new use cases for its photomask technology.
Record revenue and profit
For the third fiscal quarter, Photronics set new company records for both revenue and profit. Quarterly revenue stood at $219.9 million, up 29% year over year and 8% from the previous quarter. Most remarkably, net income grew 83% from the prior-year quarter to $31.2 million.
The company's balance sheet also strengthened as cash and equivalents rose to $381 million, with $93 million of that coming directly from operations, while debt fell nearly 50% to just $57 million.
So why is the stock down?
Even as the company topped Wall Street's expectations on both the top and bottom lines in its fiscal third quarter, Photronics stock fell more than 23% the day after the report was released.
The main sticking point for investors appeared to be management's fiscal fourth-quarter guidance. The company provided a fourth-quarter revenue outlook of $205 million to $215 million -- falling slightly short of the $214 million analyst consensus.
A significant photomask shortage has increased lead times for Photronics, which now struggles with a backlog of orders and capacity limitations. Additionally, the company mentioned a slowdown in high-end customer demand in its recent earnings call but also affirmed that mainstream demand remains robust.
These two headwinds were taken into account in Photronic's guidance, and although management has kept its expectations realistic, investors were disappointed by the outlook. Accustomed to quarter after quarter of record revenue from the company, has the market overreacted?
The future's still bright
Despite recent setbacks, CFO Frank Lee affirmed Photronics is on track to have its best year ever. The company just reached a 25-year record-high gross margin of 38%, benefiting from cost controls, higher prices, and improved operational capacity in most of its facilities.
Aware of its capacity shortcomings, Photronics has focused on expanding its production volumes while keeping costs down and margins high. The company has also honed its pricing strategy to extract the most value from its products.
With a healthy cash balance for expansion and investments, Photronics is determined to remain the market leader in photomask manufacturing. The company must first contend with some near-term hurdles, but this high-growth tech stock is worth checking out as a buy-and-hold opportunity.
