A little over a year ago, I highlighted an investor presentation from a tiny semiconductor company called Axcelis Technologies (ACLS +4.51%). Axcelis makes one specific class of equipment -- ion implantation machines -- used in the fabrication of silicon wafers (which eventually get chopped up into the "chips" that power our electronic devices). Axcelis is a beneficiary of the coming surge in demand for its machines as a new generation of chip manufacturing gets rolling.
It's been a bumpy ride since then, but Axcelis clobbered the bear market of 2022. Shares are up nearly 80% over the last 12 months, including a more than 60% surge so far in 2023. Is this semiconductor equipment stock still a buy now?
NASDAQ: ACLS
Key Data Points
What's the deal with ion implantation?
Ion implantation is a type of materials engineering. Basically, a silicon wafer can be modified at the molecular level by introducing "impurities" (another element besides silicon) to either increase or decrease its electrical conductivity. Ion implantation machines are Axcelis' specialty.
This puts Axcelis in competition with Applied Materials (AMAT +6.51%), the dominant superpower in ion implantation machines of all types. Tiny Axcelis, on the other hand, specializes in a particular type of ion implantation that is growing rapidly. You might recognize the buzzword: silicon carbide (SiC), a newer type of silicon wafer substrate that is being adopted by the electric vehicle (EV) industry.
EVs and SiC a key growth catalyst
During the last earnings call, Axcelis management said that the power device market (led by EVs) will be its key growth catalyst in 2023. "Growth" is a key word here, given that the majority of the chip fab equipment sub-industry will be in a bit of a slump, at least through the first half of this year.
Some 55% of Axcelis' 2023 revenue will likely come from its power devices, with at least half of that demand specifically driven by SiC wafer manufacturing ramp-up.
This will be a pretty good year for the small semiconductor business. Revenue is expected to be at least $1 billion, up from $920 million in 2022 (which was a 39% year-over-year increase from 2021). Additionally, management predicts earnings per share (EPS) will be up this year too. EPS increased 90% year over year in 2022 as a result of Axcelis' increasing efficiency as it scaled up to meet customer demand.
Time to go shopping?
It gets even better. Given the rapid adoption of SiC and other power chips to meet the needs of the EV industry, Axcelis thinks it can achieve annual revenue of $1.3 billion within the next two to three years. No doubt, profitability will rise too if Axcelis can meet this goal.
The basis for this outlook is that Axcelis sees SiC chip demand doubling about every three years in the coming decade, driven by EVs, renewable energy, and similar projects requiring high-voltage applications. This echoes calls for rapid growth from this chip substrate from companies like Aehr Test Systems although I'd point out this growth trend could come in fits and starts -- but that's often the norm in this industry.
Axcelis currently trades for 24 times trailing earnings per share, or 21 times free cash flow. It isn't a high premium, especially in light of management's outlook for the next few years. But it isn't cheap anymore, either.
My main bet remains on Applied Materials, which is also expecting to have a pretty good 2023 thanks to growth from mature chip markets like EVs. Nevertheless, Axcelis is a small semiconductor industry player worth getting familiar with, especially if you're looking for ways to profit from the electric vehicle and renewable energy boom that is starting to simmer.
