Nvidia has helped kick off an era of generative AI. No one knows for sure how long the boom times will last, but sales and profits -- and thus the stock price -- have been soaring. Shares of Nvidia are up some 190% so far in 2023 alone.
Will there be another Nvidia-like chip stock? Wall Street thinks it has found one. Semiconductor manufacturing equipment company ACM Research (ACMR -4.42%) has also been up big the last few years, and some analysts think the good times will keep rolling. Is this stock a buy?
ACM Research's specialty, and its specific clients
ACM Research is a Silicon Valley-based provider of chipmaking equipment. Its specialty is silicon wafer cleaning tools.
Sound boring? Don't underestimate the complexity involved in a good scrub down. Wafers undergo many dozens of manufacturing steps before getting diced up into chips and packaged into a computer, and those dozens of steps are getting more advanced every year.
Between many of those steps, a machine is needed that can gently (but thoroughly) clean and prepare the surface of the wafer before moving on to the next step, without damaging the fragile microscopic features on the wafer's surface (features that eventually govern the performance of the chips themselves).
ACM Research developed specialized tech for these critical processes. It's branched out into other areas like electrochemical plating (laying down the metal interconnects that carry electricity to different parts of a chip), furnaces, and deposition (applying layers of chemicals during parts of the manufacturing process).
It's a high-growth market, and especially so in China where chipmakers have been getting ample funding from the government to establish the country's own domestic semiconductor manufacturing industry. Interestingly, lithography leader ASML has been selling lots of its workhorse DUV machinery (the previous-gen leading-edge equipment before ASML's now famous EUV machines came out) to China as of late. A very advanced processor was found in the Huawei Mate 60 Pro smartphone, no doubt manufactured using DUV machines and utilizing many lithography exposure steps.
ACM Research's corresponding equipment sales growth from selling to China may thus not be coincidental. It reported $378 million of its $388 million total sales in 2022 went to China. That hasn't changed much in 2023, with $207 million of its $219 million total coming from customers in China the first half of this year.
Also of interest, ACM Research management has reported it is ramping up sales with a U.S.-based customer in its Oregon fab. That almost certainly means Intel, which is making a heavy push of its own with U.S.-government funding to help boost American semiconductor manufacturing.
Are the risks worth the potential reward?
ACM Research is an emerging growth play. Wall Street analysts expect upward of 40% sales growth in the coming years as the company expands into new geographies (the U.S. as well as in Europe) and broadens the types of equipment it provides chipmakers. If that growth transpires, the stock price could have massive upside.
However, given the high reliance on China for ACM Research, I rank this as a business with above-average geopolitical risk. The U.S. and trade partners, like the Netherlands where ASML is based, continue to place new trade restrictions on advanced chipmaking equipment to China. The Dutch government is expanding the equipment list ASML will need to apply for an export license starting Jan. 1, 2024. It wouldn't be a bad idea to factor in something similar eventually happening to ACM Research when figuring what's a reasonable long-term growth rate for the business.
Nevertheless, by certain metrics, ACM Research stock could be cheap. It currently trades for 16 times trailing-12-month earnings per share. However, bear in mind free cash flow was negative $135 million over the last reported 12 months, owing to ACM Research's rapid expansion. New equipment and new facilities get subtracted to calculate free cash flow immediately, while items like this are expensed in smaller chunks over time for GAAP earnings, thus creating the discrepancy between positive earnings and negative free cash flow.
Data by YCharts.
At any rate, the consensus of Wall Street analysts still seems to be that the future is quite bright for ACM Research. A five-year average growth rate of some 40% could indeed make it some sort of "next Nvidia." But those are lofty projections over a long period of time, for a company that could face headwinds including political intrigue and the general cyclicality inherent in chip manufacturing.
I have ACM Research on my radar among chip stocks that could be a buy. But I stop short of calling this a value stock that needs to be bought right now. Stay tuned for more info.
