Metrology -- jargon for the science of measurement -- has been a white-hot segment of the semiconductor industry. There's a good reason. Developing and manufacturing chips is getting increasingly complex and expensive. Metrology is a critical quality control step that can boost manufacturing efficiency and thus boost profit margins for the companies involved in making advanced semiconductors.
Enter Camtek (CAMT 4.18%), a tiny Israeli-based metrology equipment stock that's up over 180% so far in 2023 alone. With metrology and related manufacturing process control equipment expected to be a high-growth business in the coming years, is it too late to hop aboard the Camtek train?
Landing big orders from big customers
Semiconductor manufacturing equipment requires deep experience in physics and chemistry and really deep pockets. As such, this critical choke point in the world of chips and computing technology has consolidated around what I call the "fab five," by far the five largest specialists in chip manufacturing equipment: Applied Materials, ASML Holding, Lam Research, Tokyo Electron, and the dominating force in metrology, KLA Corp (KLAC 4.95%).
Besides KLA, the metrology space also comprises Applied Materials (which does a bit of everything) and small companies like Onto Innovation (ONTO 4.08%) and Nova (NVMI 2.00%). Camtek is smaller than all of them, but its stock has been outperforming.
Data by YCharts.
Camtek's secret? It has reported orders for dozens of units of its equipment, including orders for 45 machines since August 2023 alone. About one-third of those most recent orders were from leading chip manufacturers for advanced semiconductor applications: HBM (high-bandwidth memory, used in things like Nvidia's AI systems) and chiplets (advanced packaging of various small chips into a computing system).
Like everyone else in the chip equipment industry, Camtek has had a down 2023 year so far. However, the recent influx of orders for advanced chipmaking -- which is similarly happening at Onto and Nova --has led Camtek management to forecast the potential for a record 2024.
High growth for a relative value?
Camtek has leaned into its recent success and is exercising some ability to consolidate the metrology market to itself. It announced in September its intention to acquire the small FRT Metrology segment from fellow chip-equipment company FormFactor for $100 million in cash. That could further increase Camtek's trajectory for a record 2024. In addition to advanced packaging like chiplets, FRT also makes equipment for silicon carbide (SiC) semiconductors for end markets like electric vehicles.
The real dynamic behind Camtek's meteoric rise, though, is its tiny scale. It's a small business that currently generates very little in net income and free cash flow (remember the "deep pockets" part of being successful in chip manufacturing equipment?). However, as Camtek begins to reach a profitable scale, it has been flipping from minimal profit to plenty of profit.
Data by YCharts.
Along the way, Camtek has done a pretty good job of protecting its balance sheet. It ended June 2023 with $506 million in cash and investments and just $196 million in total debt.
Camtek stock now trades for a heady 38 times trailing-12-month earnings per share, but that metric could dramatically improve if Camtek's revenue and profit margins start ramping up again in 2024. Shares trade for just 27 times expected earnings per share, based on Wall Street's preliminary estimates for 2024.
I don't expect a repeat of the stock's recent performance so far this year. Nevertheless, if you expect metrology equipment to remain a hot part of the semiconductor industry in the years to come, Camtek is definitely worth keeping on your watch list, along with its metrology peers KLA, Onto, and Nova.
