Over the past few years, investors have paid a growing amount of attention to semiconductor stocks. Advanced chips are powering an increasing number of products and services, including electric vehicles, cloud computing, consumer electronics, and artificial intelligence (AI), which is driving a demand boom across the industry.
But while many investors are focused on the world's largest chip companies like Nvidia and Advanced Micro Devices, they might be overlooking some incredible opportunities at the smaller end of the market.
Axcelis Technologies (ACLS 3.06%) stock has surged 101% in 2023 so far, though it's down 21% since the beginning of August amid seasonal weakness in the broader market. It's now trading at an extremely attractive valuation, and there's reason to believe further upside is around the corner. Here's why.
Axcelis Technologies is often overlooked by investors
Axcelis Technologies doesn't produce any semiconductors itself. The company manufactures ion implantation equipment, which is critical to the chip fabrication process for customers producing processors (CPUs), memory chips (DRAM), and storage chips (NAND).
In the recent second quarter of 2023 (ended June 30), Axcelis told investors it's seeing soaring demand for its equipment from producers of silicon carbide chips. These are prominent in electric vehicles, because compared to traditional silicon-based chips, silicon carbide chips can be smaller, lighter, and far more efficient, which allows for rapid battery charging, for example.
Plus, the company said it's starting to see a ramp-up in demand from certain segments of the AI industry, specifically from customers producing memory chips.
Yet despite operating at the nexus of several technological revolutions at once, Axcelis stock is only covered by seven Wall Street analysts, according to data from The Wall Street Journal. It suggests this company is still very much flying under the radar.
Axcelis has become a financial powerhouse
Aside from Nvidia, which has been buoyed almost entirely by demand for its AI data center chips this year, most semiconductor companies have recently experienced a slowdown in growth on the back of challenging economic conditions. Consumers are buying fewer big-ticket items like computers, which is hurting demand for chips.
But Axcelis' business is unique because its equipment is necessary if chipmakers want to expand their production capacity for the future, which typically requires forward planning. Therefore, Axcelis hasn't felt much of the short-term pain other chip companies are experiencing. In fact, the company currently has an order backlog worth $1.2 billion. That's equivalent to more than one full year's worth of revenue.
Speaking of which, Axcelis has generated $527.9 million in revenue in the first six months of 2023, which was an increase of 24.2% compared to the first six months of last year. That growth -- combined with careful expense management -- also drove a 29.5% increase in the company's earnings per share over the same period.
The strong results prompted management to increase its full-year 2023 revenue forecast to north of $1.1 billion, which would be a record high for Axcelis.
Axcelis stock is extremely attractive at the current price
Axcelis stock has surged by a whopping 700% over the past five years, reflecting the company's strong operating performance. But despite the run, it's still cheap by at least one traditional valuation metric.
Axcelis has generated $6.21 in earnings per share over the last four quarters, which places its stock at a price-to-earnings (P/E) ratio of just 25.4 (based on its current stock price of $157.73). That's 14% cheaper than the roughly 30 P/E ratio of the Nasdaq-100 index, which features leading chip stocks like Nvidia and Advanced Micro Devices.
But it gets better. Axcelis regularly returns some of its earnings back to shareholders through its share buyback program. Since 2019, it has repurchased $157 million worth of its own stock, and it just added another $200 million to the program, which will be deployed over time.
Let's review: Axcelis has an enormous order backlog, management continues to increase its forecasts for the business, the company is returning money to shareholders, and yet thanks to the recent market dip, its stock is trading at a discount to the Nasdaq-100. That spells opportunity for investors.
