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We know the romance of microcaps: They're risky, but with huge potential rewards. A respected colleague brought to my attention Axcelis (NASDAQ:ACLS) and asked what my take was on the company. I'd never heard of the firm, and decided to take a look under the hood. For those who are not familiar with Axcelis Technologies, it's the manufacturer of computer chip-making fabrication equipment.

First off, let’s take a look at how Axcelis has been doing the past five years.

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It had an April 5 high of $8.01 and is currently trading at around $1.66. It’s really taken it on the chin from the financial crisis. Axcelis has been trying to claw its way back up, but its recent Q2 forecast has been relegated back to the basement, and it’s been suffering since.

Axcelis expects revenue to be in the range of $85-$92 million and earnings to be about $0.02 per share (EPS) for Q2 2011. Analysts were expecting the company to report EPS of $0.04 on revenues of $95 million for the second quarter of 2011. There were also added uncertainties caused by the earthquake in Japan to its supply chain.

There are a couple of things in Axcelis' favor, however. The company has had five consecutive quarters of EPS growth. With a book value of $1.98 and reasonable debt levels, its current valuation is roughly that of its current assets. With a forward P/E of roughly 12, it’s priced very attractively if it can continue to gain traction.

A lot of buzz was created recently with Applied Materials' (NASDAQ:AMAT) acquisition of a rival of Axcelis', Varian Semiconductor (NASDAQ:VSEA) for $4.9 billion, which of course is quite a sum. This was much higher than the valuation multiple of Axcelis, as Varian has a much larger market share. This would bode well for any future acquisition.

Insiders have been relatively bullish, purchasing over 140,000 shares in the past quarter. There has been increased institutional interest in Axcelis as well, with an increase in holdings from the prior quarter.

We know Axcelis competes in the ultra-competitive semiconductor sector. However, if management can build momentum on its current product offerings -- and with consolidation occurring -- there could be significant upside to this microcap. I would keep a close eye on this speculation play.

Source: Axcelis: A Semiconductor Stock to Watch