Axcelis Technologies (NASDAQ:ACLS) is a supplier of ion implant capital equipment to the semiconductor industry. For years they have been a niche secondary supplier to the dominant player in the space, Applied Materials (NASDAQ:AMAT), through AMAT's 2011 acquisition of Varian Semiconductor (NASDAQ:VSEA). ACLS has demonstrated in recent years that the landscape is changing and that they are gaining significant market share in the implant market, due to their relatively new Purion platform, that now represents an overwhelming majority of their new systems sales.
Ion Implant Market
While clearly not as large as some areas of the $30B+ wafer fab equipment (or WFE) market, ion implant represents a significant market that ACLS is going after, at nearly $1B annually. ACLS quotes the ion implantation market size at $825M in 2016, ~$950M in 2017 and ~$1B in 2018 (based on Gartner estimates)
The ion implant new equipment market can be roughly segmented as follows: using the $1B overall new equipment market size in '18 (per Gartner), but because we believe this year's $950M size will prove conservative it can be thought of roughly the CY17 market segments:
High Current: 60%, or ~$600M
Medium Current: 25%, or ~$250M
High Energy: 15%, or ~$150M
ACLS has, for years, has had significant share (50%+) in the High Energy segment of ion implant. As can be seen above, though, dominating the smallest segment of ion implant is not that impressive given the relative market sizes.
What has changed?
Since our last article in June 2015, ACLS has experienced some highlights and perceived disappointments (while nonetheless appreciating nicely as the former have weighed the latter) which we'll briefly outline below to get folks caught up:
- Beat Q215.
- Beat Q315.
- Disappointed on Q415 guide, but subsequently beat the guide.
- Guided Q116 inline; missed and guided lower for Q216.
- Reported a mixed Q216 and gave disappointing Q316 guidance.
- Have positively reported and guided the last two quarters (Q416 & Q117 prints/guides), thus pushing the stock higher.
Net/net, our numbers have pushed out slightly but haven't materially changed. We now currently see ~$1.20 in EPS this year (on $362M in revenue) and $1.85 in 2018 (on $420M in revenue). Using a 15x multiple on earnings and adding in our expected YE18 cash balance of $5.28/share, we arrive at our ~$33 PT, or ~50% upside.
In addition to these somewhat mixed, but improving, earnings results, they have announced a number of positive customer adoption wins for their Purion H YTD (their High Current solution; High Current represents about 60% of the ion implantation market, which we noted above, so gains here clearly have outsized positive impact on overall market share gains within ion implantation): source 1, source 2, source 3, source 4.
Given the stock has run ~100% over the last year and nearly that much since November, it's natural to wonder whether the stock has outpaced itself at this point. We don't believe so. While the stock has appreciated nicely, we see two key upside drivers:
1) Earnings revisions are going higher. The company has been gaining share in the ion implantation clearly. Any update to their ~25% market share and $950M market size estimates (market size from Gartner) for 2017 would be biased positively in my view; we could see a positive update as soon as the main industry conference (Semicon West) in July '17 in San Francisco.
2) They're being conservative on expenses, which is constraining guided earnings power. For reference, in Q117, they reported revenue/non-GAAP EPS of $87M/$0.29 vs their ~$80M/~$0.22 guidance. The leverage in the model is clearly there (they've guided to $100M in Q217 revenues and $0.30-$0.35), so if anything numbers are set conservatively, in my view, based on the revenue guidance. OpEx coming in lower and/or GM coming in higher would lead to meaningful upside. We believe they've set the bar conservatively on each.
3) While obviously hard to predict, I think they're clearly a buyout target. They expect ion implantation market share of ~25% in CY17 with a goal of getting to 40%+ with their 'spot beam' technology versus AMAT/VSEA's 'ribbon beam' in '18 where ACLS has inherent advantages as technology nodes shrink. For what it's worth, out of all the segments AMAT is in, ion implantation is the one that they don't claim share gains: source.
- A cyclical downturn in semicap equipment spending. This is always a risk in this sector, but we believe we are currently coming out of such a downturn and are poised to move upwards out of it.
- Management/board interests not aligned with shareholders. Not only (from what we can see from Bloomberg data) does management and the board own less than 1% of the company, in a number of conversations they have expressed outright antagonism towards shareholder value creation. Other than through solid business execution, they are not at all savvy public market finance people.
Specifically, an unwavering unwillingness to do any form of return of capital to shareholders specifically in the way of a share repurchase program is particularly troubling. While we believe the company's products and execution on selling them and taking market share have been excellent, we acknowledge that the leadership is not currently (or over the last few years) acting in the interest of shareholders and are more interested in entrenching themselves in their current roles. Given the company's execution and share price appreciation, we see the lack of a buyback at any point in the last several years as the management/board simply shirking their fiduciary duties and entrenching their positions in their own management roles.
This makes the company ripe for activism, as we believe the management team and board needs a complete overhaul. Yes, we still like this investment a lot, but we acknowledge a key problem that exists - leadership either needs to change their view or be forced out through activism or a buyout (which we do not claim to have visibility into). Given the stock's 100% run in the last year and the company's more than ample balance sheet, we believe the company's CFO clearly showed a lack of understanding of capital appropriate capital allocation over the last few years (as did the board) and needs to be replaced.
Based on our earnings-based PT target that yield roughly 50% upside, we still very much like the position despite the significant rally. We do believe that activism, the board firing the CFO, and/or a private equity buyer stepping in would hasten the appreciation to fair value.
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Disclosure: I am/we are long ACLS.
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.