While the AI semiconductor market is largely on fire, semiconductor companies leveraged to electric vehicles and auto and industrial chips are actually in a downturn.
These stocks had maintained strong growth in 2022 and early 2023, but with the EV market slowing in the back half of this year and China's economy in the dumps, the auto, electrification, and industrial chip sector is now having the downturn other chip stocks felt in 2022.
Given how strongly AI chip stocks recovered after their 2022 downturn, electrification chipmakers may be a great place to look for bargain-priced stocks right now. One key player is ion implant equipment player Axcelis Technologies (ACLS 1.74%). With its stock now down 45% from its highs, is now the time to pounce on this key industry player?
What Axcelis does
Axcelis is a leader in ion implant equipment, a process by which the ion of one element is implanted within another solid material. While virtually all semiconductors are made on silicon wafers, infusing certain elements within the silicon wafer can alter its properties and enhance properties of the chip. For instance, silicon carbide is an up-and-coming alloy used in power chips for electric vehicles because of the material's durability and higher conductivity.
Recently, Axcelis stock has plummeted as global electric vehicle sales have slowed, China's economy remains in a downturn, and higher interest rates arrest the sales of big-ticket items like appliances that also use trailing-edge chips.
However, with Axcelis' valuation now cut to just 15 times earnings, and with the company having over $500 million in cash on its balance sheet and no debt, is now a big opportunity? Or does the stock have further to fall?
Reasons to buy
Near-term investors may have reason to be nervous. While last quarter saw 6.2% revenue growth, that marked a deceleration from Axcelis' full-year 2023 growth rate of 23%. Moreover, management guided down for the current quarter's revenue to be down about 20% sequentially.
Management recently shed light on the broader picture beyond this quarter. It believes that the silicon carbide market, where Axcelis gets about half its revenue, will remain strong. And while other types of trailing-edge semiconductors and memory applications will see a downturn in the first half of the year, these markets should pick up in the second half. Overall, management sees revenue dipping but then recovering for a flat revenue year overall in 2023.
Management also put forward guidance for $1.3 billion in revenue in 2025, up from just over $1.1 billion last year and this year, along with expanding margin. That would mark 15% growth, and management also believes the company can grow beyond 2025 as well.
While Axcelis is no doubt hitting a downcycle, as are several of its semiconductor peers, its long-term growth should outpace GDP. For example, 2023's revenue marked a huge 71% increase over Axcelis' 2021 revenue, so it's had marquee growth. And since 2012, when it made just over $200 million in revenue, Axcelis has compounded revenue at a 16.8% annualized rate over 11 years.
So even if revenue stagnates this year, buying a 16.8% grower at a 15 P/E multiple would amount to a PEG ratio of less than 1. That's generally considered a cheap valuation for a growth stock.
Image source: Getty Images.
Risks to the story
Of course, it's quite difficult for a company to maintain a long-term growth rate of 16.8%, or even double digits, because of the law of large numbers. So it's possible Axcelis' long-term growth decelerates to a lower number.
That would be especially true if the electric vehicle market continues to disappoint. Though estimates of long-term growth for EVs remain high, the current slowdown does leave some doubt as to how quickly EVs will overtake internal combustion engines.
Axcelis also gets a lot of its revenue from China. On the recent conference call, management agreed that around half of its revenue in 2024 would probably come from China.
That comes with its own risks. China would obviously like to develop its own chipmaking tools, especially in electrification, now that the U.S. has restricted most AI chipmaking tools from being sold there. While Axcelis has some cutting-edge technology today, it's possible China's government initiatives could one day help fund a decent domestic competitor.
Moreover, it's tough to square the current string of orders from China if its economy remains muted, For instance, one analyst on the conference call noted that China's factory utilization is quite low currently, so why would they buy more machines?
Management reiterated that China is making strategic investments as it seeks to become the world leader in electric vehicles and electrification technologies. And while that may be true, China may only be able to overbuy machines relative to its economy for only so long.
The positives outweigh the negatives
While there are definitely risks to the outlook, I still think EVs will eventually become the dominant type of passenger vehicle sold sometime in the next 10 to 15 years. While it may happen in fits and starts, the costs of the electrification technology continue to come down. Moreover, given that China appears to be barred from investing in leading-edge AI chips because of U.S. restrictions, I think China will probably support its trailing-edge power semiconductor industry regardless of a slow economy. Finally, Axcelis management noted that it has had knock-off Chinese competitors for 20 years or so, but Axcelis continues to be differentiated and has obviously managed to grow a lot over that span.
Electrification stocks have sold off hard over the past six months. But if you're a long-term believer, Axcelis looks like solid buy on this dip.
