2022 and 2023 haven't been great years for most of the semiconductor industry. PC and smartphone sales fell off a cliff after elevated pandemic-era consumer purchasing, and later in 2023, this was compounded by a drop in demand for some data center servers -- excluding those powered by Nvidia (NVDA 6.18%), of course.
Semiconductor demand appears to be bottoming, though, and the industry could be heating up as 2024 draws near. Amkor Technology (AMKR 1.76%) is a top outsourced semiconductor assembly and test (OSAT) company, trading for a meager valuation of less than 10 times trailing-12-month earnings. Is it too cheap to ignore?
Amkor indicates a new bull market
OSATs are an important part of the semiconductor supply chain. Once a fab (a facility that makes chips) is finished making silicon wafers, those wafers need to be chopped up into chips and packaged into a computing or electronics system. That's where Amkor and its OSAT peers, like Hon Hai Precision Industry (HNHPF 2.17%) (better known as Foxconn, which handles a lot of Apple's (AAPL -0.35%) devices), ASE Technology, and Jabil Industry (JBL -0.18%) come in.
Amkor reports its revenue in four segments: Communications (smartphones and tablets, 41% of revenue last quarter), automotive and industrial (23% of revenue), computing (primarily data centers, but also PCs and laptops, 20% of revenue), and consumer electronics (16% of revenue). Through the first half of 2023, sales decreased 6% from the same period in 2022 to $2.9 billion, especially driven by the big downturn in smartphone and PC sales.
However, in the second quarter, Amkor said some of these markets, communications in particular, were showing signs of firming up. Communications and computing revenue increased 7% and 5%, respectively, year over year, although it was the consumer segment that continued to drag down business overall with a 27% decline from 2022.
In a further sign that things are looking up, management said it expects third-quarter sales to reapproach all-time highs and come in at $1.775 billion at the midpoint of guidance, up about 22% over the prior quarter. Earnings per share (EPS) are also expected to rally in a grandiose fashion, with the guidance range implying as much as a doubling in EPS from the second quarter to the third quarter.
With this kind of quick rebound in the works, perhaps Amkor stock is a screaming value right now as advanced packaging for smartphones, PCs, and data center servers (including AI servers) heats up.
Why the cheap valuation?
However, there's an important point to bear in mind. Historically, Amkor tends to trade for lower valuations. As an OSAT, it's highly reliant on semiconductor designers and manufacturers, as well as the final computing device and automaker customers that need its assembly services. That makes Amkor cyclical, and it tends to have very thin profit margins, too -- a norm for the OSAT subindustry.
Data by YCharts.
That said, advanced packaging techniques aren't getting any easier but should be in increasing demand for the foreseeable future -- much as was the case last decade when smartphones and other mobile computing technology were advancing rapidly. Amkor could have a lot to gain as vehicles transition to electric drivetrains and adopt more autonomous driving features (it's the top automotive OSAT), and as data centers rapidly adopt new AI services.
Additionally, the company has been making steady progress on its balance sheet, reporting for the first time more cash and short-term investment ($1.2 billion) than total debt ($1.13 billion) at the end of July 2023.
The stock recently sold off on news that the 915 Investments holding company of the Kim family (the founders of Amkor, and by far its largest shareholders via various investment holding entities) was selling 10 million shares at $24 apiece. Investors are never happy with that kind of insider selling. It's worth noting the Kim family will remain Amkor's largest investor, so future selling could continue to cause downward pressure on the stock.
After the most recent dip in stock price, Amkor now trades for less than 10 times Wall Street analysts' expectations for 2024 EPS. The company is spending cash from its operations to expand some of its facilities, including a new one that will open later this year in Vietnam, so the resulting valuation based on next year's expected free cash flow (FCF) is a less-cheap-looking 23 times FCF.
Nevertheless, Amkor could be too cheap to ignore right now as the semiconductor market comes out of a particularly tough 2022 and 2023. Personally, I favor the semiconductor manufacturing equipment companies right now, which count Amkor and many others as a customer. Keep this manufacturing leader on your watchlist.
