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Chip stocks are notorious for running hot and cold, and there's definitely a warming trend going on for Amkor Technology (Nasdaq:AMKR). Amkor provides assembly and test services to chip makers. When we wrote about AMKR eighteen months ago, the stock had plunged from $20 at the start of 2004 to $3.60. Now it's back up near $9 and a strong earnings report last week is driving earnings estimates higher as well.

Amkor provides outsourced manufacturing solutions to the semiconductor industry. Outsourcing is a trend sweeping across many high-tech industries and is expected to drive impressive growth for companies catering to this surge in demand for outsourced production.

In the latest quarterly numbers from Amkor reported last week, revenue increased 30% to $713.8 million, underpinned by demand from wireless, mobile, and gaming console markets. The company swung to a profit of 27 cents per share from a loss of 11 cents last year, beating the consensus by 3 cents. Amkor also gave Q4 guidance that was stronger than the analyst consensus. The company expects EPS in a range of 20 to 24 cents and revenue of $678.1 to $692.4 million.

Amkor dominates the test and assembly services segment of the semiconductor industry. Amkor solidified that dominance in 2001 when it bought three huge assembly plants in Korea from its main foundry partner. Amkor was already using these facilities through a long-term supply agreement with the seller, Anam Semiconductor, but it wanted to buy them to improve margins and lock up access to this packaging capacity.

Chip makers are increasingly moving to advanced packaging solutions such as flip chip, system in chip, stacked chips, and MEMS. With the industry's growing reliance on advanced packaging for higher performance, chip makers are more likely to outsource as they ramp up production again. The rising cost and complexity of manufacturing is just one reason. Chip makers want to focus on product design, marketing, and sales with an eye toward getting new products to market quickly and having the flexibility to respond to changing markets more rapidly. Time to market is critical with the short product cycles of the semiconductor market.

Independent contract manufacturers like Amkor can leverage their manufacturing expertise and global capacity to significantly lower production and distribution costs. While manufacturing is a decidedly unglamorous side of the chip world, investors like the business for its tremendous long-term growth prospects. The incredibly cyclical nature of this industry and the volatility of AMKR's share price (the beta is 4.5) are too much to take for many investors, though, so the risk-averse need not apply.

The stock is back in an uptrend for now, and while most Wall Street analysts are still cautious about it, Matrix Research just upgraded AMKR from Sell to Strong Buy yesterday. Amkor may never be a household name like Intel, but it is an important behind-the-scenes player to know in the chip industry.

Disclosure: Author has no position in AMKR

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Source: Amkor Technology - Riding the Chip Cycle