In the eight months or so since I last wrote on Veeco Instruments (NASDAQ:VECO), this semiconductor and LED tool manufacturer has been on a wild ride. While the shares did spend about a month earlier this year above the fair value estimate of $17.50 I offered in that piece, the shares have since sold off sharply as my concerns about a peaking MOCVD market and inconsistent performance from the Ultratech acquisition seem to be coming to fruition.
My position on Veeco isn’t really all that much different now. I do believe the shares are undervalued, but I believe the traditional MOCVD market is only going to get more challenging and I’m not sure that opportunities like ion beam etch, MOCVD for VCSEL, and Ultratech’s advanced packaging, LSA, and metrology will be enough to fully compensate. Although I think there’s a valid case to be made that Veeco shares should trade in the mid-teens, I’d rather own stocks like Advanced Energy (AEIS) or VAT (OTCPK:VACNY) if I had to own something in the tool/semi equipment space today.
The LED MOCVD Expansion Cycle Comes To An End
Veeco’s second quarter financial results weren’t all that bad relative to expectations, as revenue was a little shy of sell-side expectations and EPS were a little better. Revenue rose 40% year-over-year and fell slightly on a sequential basis, with the MOCVD business growing 62% year-over-year and the front-end business growing 74%. While the AP and Scientific & Industrial businesses grew less impressively, both were still up on a year-over-year basis (and both were down sequentially, with S&I down 16%).
Gross margin improved on an adjusted basis, expanding almost one and a half points from the year-ago level but shrinking a little more than a half-point sequentially. Veeco reported a sizable operating loss, due in large part to an
