Amkor: Don't Panic

| About: Amkor Technology, (AMKR)
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Executive summary:

  • Amkor reported mostly in-line results for the MRQ, but top-line guidance fell short
  • Guidance fell short principally due to high end smartphone/tablet slowdown
  • Amkor is both gaining share at the high end and low end (notably Apple), making a second-half rebound easier to play

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Amkor (NASDAQ:AMKR) is a name that I highlighted as a "Top Idea" back in the summer of 2013. The shares were trading extremely cheaply ahead of what seemed to be a slew of positive structural and secular trends. In the original piece, I believed that ~27% upside from then-levels was more than likely and - despite some initial turbulence - the stock finally broke out and even slightly exceeded my more conservative price target of $5.66/share.

Unfortunately, while I did capture a good portion of the run, I sold my shares for "just" a 22% gain and missed the final leg to the $6 level, as I was happy with a 22% return in just 3 months (88% annualized return). That being said, I re-initiated the first quarter of a position ahead of the company's February 10 report, and will be using the drop to add to my position.

A Miss Is A Miss, But It's Not (That) Important

While the company posted a nice bottom-line beat (and a very small top-line miss) for the most recent quarter, the guide for the current quarter came in fairly uninspiring. Indeed, the Street was looking for $720M at the midpoint, but the guide came in at $650M - $700M, implying a midpoint of $675M ( a pretty sizable miss).

Now, the problem here is that Amkor, as a chip packaging and test house, is a very capital intensive business. Its gross margins are very highly dependent on capacity utilization, which makes the firm's P&L rather volatile on a quarterly basis. To illustrate, the guidance range for the current quarter's gross margin is 14-17% with net income per share ranging from a loss of $0.02 to profit of $0.08. That said, this is really immaterial to the longer-term picture here.

It's A Second Half Story For Those Flagships

The first quarter of Amkor's FY2014 is down ~11% sequentially at the midpoint due to both seasonality and to general weakness in the high end of the mobile market. So, the real "question" that investors need to answer is this:

Will the launch of new flagship devices in the second half of 2014 drive this big second-half uptick?

On one hand, according to Digitimes, Amkor will be getting roughly 40% of Apple's (NASDAQ:AAPL) next generation A8 chips to package and test. If this is true, then regardless of the underlying secular trends in the market, Amkor will see a meaningful increase in its share of the mobile apps processor business and a nice revenue uptick from the next generation iPhone in the second half of the year.

Amkor's management is also particularly bullish on the launch of next generation 20-nanometer applications processors (likely Apple's and Qualcomm's (NASDAQ:QCOM)). While faster/more powerful apps processors won't exactly make/break the secular trend in high end smartphones, it is likely that Amkor also secured a greater portion of the packaging and test orders from the likes of Qualcomm, which would further help this second half story.

That Said, Amkor Seems To Be Hedging

Even with the party line that new flagship smartphone launches will ameliorate the industry's issues, the company doesn't seem to be betting the farm on this thesis. Indeed, on the call, management dropped the following:

To support this initiative we reorganized our Asia sales team and are making rapid progress building a world-class support group. We expect sales to Chinese and Taiwanese fabless chip companies to increase by a factor of 2 to 3 in 2014. Our technology leadership, our factories in Taiwan and China, and our talented employees are fueling success in the region.

The majority of the apps processors/silicon content that comes from Chinese/Taiwanese design houses (think MediaTek, AllWinner, etc.) is actually geared towards the mainstream/value segments of the mobile market. This suggests that the company is looking to increase its exposure to these higher volume/lower cost products in a bid to spur growth. Success here would be an unequivocal win for Amkor as the low end of the mobile market is still growing extremely rapidly.

The Long Term Trend Is Clear

From a longer-term perspective, it's pretty clear that both IDMs and fabless companies alike are outsourcing packaging and test, and it's becoming even more clear that packaging and test will become even more difficult (i.e. more dollars per unit for the OSATs) over the next several years as ICs move to 2.5D/3D packaging. This is likely to reward companies with technology leadership and from my work in this space, Amkor seems to have a technological edge over its competitions such as Advanced Semiconductor Engineering (ASE).

Conclusion

This "dip" ahead of a powerful second half story could offer a pretty solid entry point for investors new to the story or perhaps investors looking to add to their positions. While there is risk that the second half story isn't as big as management expects, the story isn't just driven by secular trends - it's a share-gain story, too, which makes it an "easier" story to buy.

Disclosure: I am long AMKR. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

Additional disclosure: I plan to add to my AMKR position over the next 72 hours.