The semiconductor industry is incredibly diverse, and while investors' attention has been occupied by giants like Nvidia this year, they might be missing some great opportunities at the smaller end of the market.
Semiconductor service company Axcelis Technologies (ACLS +0.47%) is valued at just $4.2 billion. Yet, it has delivered strong revenue and earnings growth over the last 12 months while many other companies in the chip sector have suffered slowdowns due to tricky economic conditions.
Amid the broader sell-off in the technology sector since August, Axcelis stock has fallen 36% from its all-time high. But investors should consider buying the dip, especially at the current price, which looks like an absolute bargain by one key metric.
NASDAQ: ACLS
Key Data Points
Playing a key role in semiconductor production
Axcelis isn't a chip producer. It makes ion implantation equipment which is key to the fabrication process. In the third quarter, the company continued to experience strong demand for one line of products: Purion.
This equipment is used in the manufacturing of power devices, which process and deliver electric power in workloads that require high currents. The Purion line is especially popular right now for chip companies manufacturing hardware for the automotive industry because it's capable of producing high volumes of silicon carbide power devices.
These are far lighter and more efficient than traditional silicon-based hardware, and those qualities are becoming more important in electric vehicles, for example, because consumers want longer battery lives and faster charging times.
Axcelis is also preparing for artificial intelligence (AI) to drive strong demand for its equipment in the long term. The company recently noted that AI will require chips with substantially more memory (DRAM) and storage (NAND) capabilities than traditional hardware. That will be a tailwind for its business.
Another strong quarter of financial results
Many chip companies (other than Nvidia) have suffered revenue slowdowns over the past 12 months because consumers are buying fewer computers and gaming devices in light of higher interest rates and tough economic conditions.
But Axcelis has consistently grown its revenue and earnings throughout this period thanks to its ability to meet demand in emerging industries that continue to grow, including electric vehicles and AI. Plus, Axcelis is less susceptible to short-term economic shocks because chipmakers often plan their capital expenditures years in advance, and the company's equipment forms a part of those plans.
In Q3, Axcelis' revenue came in at $292.3 million, or a 27% increase year over year -- and that actually marked a growth acceleration from the first and second quarters. In addition, due in part to careful expense management, the company also grew its earnings by a whopping 64% to $1.99 per share.
But it gets better. Axcelis has an order backlog worth $1.2 billion, which is equivalent to more than one full year's worth of its revenue. That means the company has a strong pipeline of work going into the new year, and it will be insulated in the near term even if there is a further slowdown across the semiconductor industry.
Image source: Getty Images.
Why Axcelis stock is a buy right now
Axcelis has generated $6.99 per share in trailing 12-month earnings, and based on its current stock price of $128, it trades at a price-to-earnings (P/E) ratio of just 18.3.
That's a 36% discount to the 28.9 P/E ratio of the Nasdaq-100 index, which is a good barometer for the average valuation of quality technology stocks. Axcelis stock also trades at a substantially cheaper P/E ratio than some leading chip stocks, and given the company's revenue and earnings growth, it looks like a bargain:
|
Company |
Price-to-Earnings Ratio |
|---|---|
|
Axcelis Technologies |
18.3 |
|
Advanced Micro Devices |
42.3 |
|
82.8 |
Data source: Axcelis Technologies, Advanced Micro Devices, Nvidia. P/E ratios based on trailing 12-month earnings. Figures accurate as of Nov. 2, 2023.
In September, Axcelis authorized a $200 million stock buyback program to return money to shareholders. That adds to the $157 million in buybacks the company has completed since 2019.
This might be a fantastic opportunity to buy Axcelis stock. It continues to grow its revenue and earnings at a robust pace, which makes its current low valuation incredibly hard to justify relative to the broader market and other stocks in the semiconductor industry.
