Shares of semiconductor-manufacturing equipment company ACM Research (ACMR -4.42%) are up just over 100% since last December as the company ratchets up its sales to China's burgeoning chipmaking industry. Revenue is up 38% through the first nine months of 2023, and earnings per share (EPS) have more than doubled.
That said, after a massive run-up, it looks like ACM is showing signs of slowing a bit. Optimism is still running high, though, as China is highly motivated to develop its own chip manufacturing capabilities to meet domestic demand. Is the stock a top semiconductor buy for 2024?
ACM Research is growing despite U.S. export restrictions
As I discussed a few months ago, ACM is based in Silicon Valley, but the vast majority of its revenue comes from China. Of its total $387 million in sales through the first nine months of 2023, nearly $376 million came from customers in that country. With numerous export restrictions on chip and manufacturing equipment in place from the U.S. government, how is a company like ACM able to skirt this obstacle?
For one thing, most of the company's equipment is for the cleaning and preparation of silicon wafers (the disks you see being held by people in lab suits) which later get cut into chips. Wafer manufacturing takes a slice of silicon through many dozens of steps, and these big and expensive cleaning machines are crucial between many of these steps in a chip factory (or fab).
These days, China's upstart fabs are in need of what's called mature manufacturing nodes, processes that are well established and not considered leading-edge chipmaking (like for AI chips, which is where most of the U.S. export restrictions are targeted).
So ACM is allowed to ship machines for these mature nodes, many of which are for China's fast-growing auto and electric vehicle industry.
That said, ACM does have some newer equipment used in more-advanced chip manufacturing, including for AI chips. Trade restrictions are in place on these machines for China, but ACM is working hard to expand relationships with chipmakers in the U.S. and Europe to diversify its revenue base.
Nevertheless, most of the development and manufacture of ACM's machines for China actually goes through a subsidiary business called ACM Shanghai. That subsidiary had an initial public offering (IPO) in China in 2021, though ACM Research remains the majority owner, with an equity stake of just over 82%.
It's a bit of a complicated business structure, especially for U.S.-based investors worried about geopolitical risks. But it has gotten the job done for ACM, and it has led to some exceptional growth as its Chinese fab customers have been gobbling up the company's wafer cleaning and prep equipment over the last few years.
Data by YCharts. TTM = trailing 12 months.
Time to go shopping for this semiconductor stock?
Besides ACM's business structure (including exchange-rate fluctuations owing to most revenue coming from China) and possible political flare-up risks, also remember that this is a fast-growing company. And as such, profitability isn't quite so cut-and-dried.
Net income under generally accepted accounting principles (GAAP) has more than doubled in 2023, at $71.5 million in the trailing 12 months. But free cash flow is in the red (negative $165 million over the same span of time). That's due to high capital expenditures, especially in support of ACM's expansion in newer markets like South Korea, where it has ambitions to grow quickly in the coming years.
Data by YCharts.
Thus, the stock's cheap-looking valuation just shy of 17 times trailing-12-month EPS might not be as cheap as it appears at first glance.
Also, it looks as if a slowdown is coming. Management recently tightened its full-year 2023 revenue guidance to a range of $520 million to $540 million, compared to a high-end outlook for $585 million before.
The update now implies 2023 revenue growth as high as 39%. Still good, but management cited impact from trade restrictions and uncertainty in timing of delivery of equipment to certain key customers.
In other words, it's been an epic year of spending for many Chinese chip fabs, and a bit of a pause could be in the works as the new year approaches.
However, it seems clear that ACM Research is a top way to bet on the expansion of China's chipmaking goals. This is a small stock in the semiconductor-manufacturing equipment sector with lots of potential, so it remains on my watch list for 2024.
