Aside from the explosion in demand for data center chips designed for artificial intelligence (AI) workloads, most segments of the semiconductor industry have struggled this year.
Elevated inflation and rising interest rates have crushed demand in the personal computing and gaming categories, for example, leaving some leading chipmakers with very little revenue growth. But there are signs the worst might be over -- Micron, which produces memory and storage chips, told investors last month that pricing and inventory levels have likely bottomed out, which could drive a recovery across the industry.
That might be great news for Advanced Micro Devices (AMD 3.46%) and Axcelis Technologies (ACLS 3.98%), which report their latest quarterly financial results in the next few weeks. Here's why investors might want to buy shares in both companies this month.
NASDAQ: AMD
Key Data Points
1. Advanced Micro Devices is gearing up to ship its new AI chips
AMD is a world-recognized leader in the semiconductor industry. Its chips are the go-to choice for manufacturers of popular consumer electronics including personal computers, gaming consoles, and even Tesla's electric vehicles. But the company's significant exposure to the consumer has been its downfall so far this year.
In the first half of 2023, AMD generated $10.7 billion in total revenue, a 13.8% drop compared to the same time last year. The weakness was headlined by the company's client segment, which includes chips specifically for personal computers and notebooks, where revenue sank by 59% for the period.
Most of that loss occurred in the first quarter, however, because second-quarter client revenue was up sequentially. That's consistent with the bottoming out in inventory levels and pricing suggested by Micron, and AMD told investors the second half of the year will be much stronger for the segment.
When chipmakers and their customers are sitting on too much inventory, they have to dramatically slash prices to move as much product as possible before the technology is surpassed by the next generation of hardware.
AMD is also focusing heavily on artificial intelligence (AI) right now. The company believes AI will be a big driver of demand for computers and mobile devices, and it has produced the industry's first mobile x86 processor with an AI engine, the Ryzen 7040.
Image source: Getty Images.
However, the greater AI opportunity will likely be in data centers, as leading providers of cloud computing services race to fit their infrastructure with enough processing power to deliver the technology to their business customers. AMD recently unveiled its purpose-designed MI300 chips, which are set to ship before the end of this year. They could help supercharge the company's data center segment, which was flat through the first six months of 2023.
The MI300 lineup will give AMD an opportunity to snatch some of Nvidia's dominant 90% market share in the AI data center segment. Nvidia CEO Jensen Huang says there is $1 trillion worth of existing infrastructure that needs to be upgraded to support accelerated computing and AI, and AMD wants a slice of that pie.
During the second quarter of 2023, AMD said its AI engagements with customers surged sevenfold compared to just three months earlier, which is a clear signal that demand is waiting for the company's new hardware.
AMD stock has jumped 64% this year so far, but it's still down 32% from its all-time high. Since the company is likely facing a sustained recovery across the majority of its core segments later this year, now might be a great time for investors to buy in.
NASDAQ: ACLS
Key Data Points
2. Axcelis Technologies continues to work through a huge order backlog
Unlike AMD, Axcelis doesn't design or produce any chips. Instead, the company makes ion implantation equipment that is key to the fabrication of processors (CPUs), memory chips (DRAM), and storage chips (NAND). Despite the slowdown across most semiconductor segments, Axcelis' business continues to grow rapidly as chipmakers plan their equipment purchases for the long term, so this company is less susceptible to economic gyrations.
The company continues to announce a steady stream of product sales to semiconductor producers around the world. In July, for example, it announced multiple shipments of its Purion Power Series implanters to manufacturers of silicon carbide chips, which are used in electric vehicles for their increased efficiency compared to traditional chemistries.
That segment was a major source of growth in the second quarter of 2023 (ended June 30), when the company generated $273.9 million in revenue, a 23.8% year-over-year increase. And investors might see similar strength in the third quarter (ended Sept. 30) when Axcelis reports its results on Nov. 1, because it announced a further shipment to category leader Wolfspeed in late July, which is in the process of investing $6.5 billion to expand its chip production capacity.
Plus, Axcelis has an order backlog of over $1.2 billion, which is equivalent to more than a full year's worth of revenue. That should lead to continued strength in its financial results for the next 12 months at least.
The stock has more than doubled in 2023, but at recent prices it's trading 20% below its all-time high. Based on the company's $6.21 in trailing-12-month earnings per share, its stock trades at a price-to-earnings (P/E) ratio of just 25.8. That's a 14% discount to the 30 P/E ratio of the Nasdaq 100 index, which includes chipmakers AMD, Nvidia, and Micron. So, despite Axcelis' rock-solid operating performance this year, its stock is still cheaper than many of its peers.
And it gets even better for investors: Since 2019, the company has returned $157 million to shareholders through stock buybacks, and last month, it announced it was adding $200 million to that program. Clearly, management sees value in the stock at its current price.
There is no time like the present to buy Axcelis stock, because it's unlikely to trade below its all-time high for much longer, especially if conditions do improve for semiconductor producers from here.
