ACM Research Outperforms

Jun. 17, 2020 10:32 AM ETACM Research, Inc. (ACMR)LRCX5 Comments3 Likes
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Douglas Adams


  • ACM Research delivered a stunning value performance through the end of the COVID-19 ravaged 1st quarter, leaving the S&P benchmark and its closest rival in swirling market dust.
  • Almost 94% of ACM Research revenue comes from front-end, single-wafer wet cleaning equipment with back-end plating and cleaning equipment posing as a vast market opportunity for future growth.
  • With China semiconductor manufacturing shut out of high-end western chips, Beijing continues to spend lavishly on its self-sufficiency program.
  • ACM Shanghai IPO on the Shanghai Stock Exchange plays directly into Beijing's self-sufficiency program which will drive ACM growth for the foreseeable future.

About a month into the recently anointed recession of 2020 and at about the time when the S&P 500 was still scratching about the bottom, ACM Research (NASDAQ:ACMR) brazenly streaked for the Nasdaq heavens. With (copious) market liquidity provided by the Federal Reserve, the stock brazenly put up solid gains in April followed by sweeping thrusts to the upside through much of May. ACM simply blew past its 200-day moving average (orange line) in the third week in March, leaving the S&P 500 benchmark (gray area) and close rival, Lam Research (LRCX) (purple line) in swirling market dust. ACM finished the period with a stunning value performance given both the S&P 500 and LRCX up a scant 44% and 57%, respectively since the 23rd of March through Tuesday's (16 June) market close (see Figure 1 below).

Figure 1: ACM Research, Lam Research against the S&P 500

About 94% of ACM's total revenue comes from the sale of single-wafer wet cleaning and other front-end (before metal application) equipment in chip fabrication, a process that could entail up to 200 separate cleaning applications. The cleaning process removes particles, contaminants of both metallic and organic origins, and other random defects of the manufacturing process. Front-end equipment includes tools such as the Space Alternated Phase Shift (SAPS), introduced in 2009, which is geared for both flat and patterned wafer surfaces. The cleaning process uses alternating megasonic waves at the microscopic level to remove random defects across the entire wafer. Timely Energized Bubble Oscillation (TEBO), introduced in 2016, delivers precise, multi-parameter control of bubble cavitation during megasonic cleaning. The cleaning process is geared toward 2- and 3-dimensional wafer configurations in the 1x nanometers (1 billionth of a meter).

The semiconductor industry has relied on wet water baths, or wet benches, in both front end and back end (after the metal application) equipment, using an array of chemicals, acids, and base chemistries in the cleaning process. Out of growing environmental concerns, these baths and batch sprays are slowly embracing greener applications. The Tahoe tool, introduced in 2018, uses significantly less sulfuric acid than more conventional high-temperature cleaning applications.

About 6% of ACM revenues now come from back-end tools, a budding growth space for the company. In April 2019, ACM introduced the Electro-Chemical Plating (ECP) tool used for applying copper, tin, and/or nickel to semi-finished wafers. The Ultra Furnace tool, introduced in April of this year, is the company's first foray into dry processing applications that supports low pressure chemical vapor separation (LPCVP). The potential market for the process is estimated to be about $1.5 billion. ECP, stress-free polishing, semi-critical cleaning, and vertical furnaces add another $3.5 billion to $5 billion in market opportunity. The furnace tool was followed last month by the Ultra C Family of tools for both back- and front-end automated cleaning. While many of these tools have both front and back end applications, each tool maintains certain technical and cost advantages that determine their use throughout the fabrication process. Accordingly, the industry will likely remain segmented with each process maintaining a certain level of market share moving forward.

Arguably, successfully navigating COVID-19 was the quarter's biggest challenge irrespective of the industrial or service sector. It goes without saying, just how that challenge is met assumes outsized importance both for the balance sheet and forward growth. For many companies, COVID-19 disruptions to supply chains, stay-at-home mandates, sickened workers, and social distancing placing present a variety of challenges for the production process - not to mention constraints on demand in the greater economy - and one or all combined pack sufficient headwinds to bring even the best-positioned company to its financial knees.

Through the end of the 1st quarter, ACM revenue hit $24.3 million, up just under 19%. Gross profit for the quarter came at $10.2 million, up just under 16%. Operating income, however, fell 46% to $1.2 million as operating expenses soared 46% for the period, paring about $1 million in income for the period. Sales/marketing and G&A expenses rose 60% and 20%, respectively-on top of a $55,000 stock-based compensation payout during the reporting period. G&A expenses were elevated due in part to one-off listing expenses associated with the company's upcoming ACM Shanghai IPO on the Shanghai Stock exchange. R&D expenses rose almost 33% in support of new product development and launches during the quarter and beyond. Net income came at $1.7 million (down just over 8%) and earnings at $0.08/share (down 33%) YOY. On an annual basis through the 4th quarter 2019, ACM revenue came at $107.5 million, up 44% with gross profit up 47% YOY. Operating income soared 174%, pushing net income and EPS to equally lofty heights of 195% and 168% YOY.

Over a five-year period starting from FY2015 through FY2019, ACM annualized revenue grew 28% with gross profit coming in a shade over 29% for the period. Operating income grew at an equally robust pace of 29% while earnings per share eked out an 0.41% gain to $0.99/share that remained surprisingly flat given the three-fold growth in operating income between the two data points. Operating expenses were growing at an annualized rate of almost 30% for the period.

Lam Research has a market cap of $41 billion, compared to ACM's $1 billion market cap, so Lam is much bigger than ACM. Through the end of the 1st quarter, Lam's revenues came at $2.5 billion, up 3% YOY. Gross profit came at $1.2 billion, up 9% with operating income posting $686.5 million, up 21% for the period. Net income was up just over 5% at $574.8 million while earnings per share was at $3.88/share, up 12% YOY. Revenues through the company's fiscal 4th quarter ending June 2019 came at $9.7 billion, down 13% YOY. Gross profit at $4.4 billion moved in the same direction, declining 16%. Operating income was down 23%, pushing net income to $2.5 billion, down 8% for the period. Diluted earnings rose just under 5% at $13.70/share.

Over the past five years, Lam's annualized revenue growth stood at 13% while gross profit grew at a 12% rate. Operational income grew at 23% with net income growing at 27%. Earnings per share grew at 30% for the period. Operational income grew at an annualized rate of 23% while net income grew at 27% over the period. Earnings per share came in at 30%.

In December, ACM announced negotiations to acquire land rights in the Lingang region of Shanghai which will be the future site of a fully owned R&D and a production facility. An agreement in principle is expected sometime in the latter part of the year which could mean construction possibly beginning by year's end. According to this timeline, production could begin in late 2022.

In the meanwhile, the IPO of ACM Shanghai is expected to be submitted this summer for review by the Shanghai Stock Exchange and the China Security Regulatory Commission, with the pricing of the IPO happening in the latter part of the year or early 2021 if all goes well. The IPO, coupled with the opening of a new production facility in Lingang, would not only increase the company's profile but also the Asian profile. The capital infusion from the IPO will solidify ACM spending with local suppliers and become a driving force in the company's long-term business planning and growth.

With China largely shut off from advanced western chip designs for the foreseeable future, Beijing continues to invest heavily in semiconductor manufacturing while aggressively hiring chip talent, primarily from Taiwan. With Taiwan's TSMC producing a 5 nm chip this year, China's Semiconductor Manufacturing International Corporation (SMIC) is reported to be spending upward to RMB8 billion on expanding production on the company's most advanced 14 nm chip and remains under tremendous pressure to catch up. High-end chips sorely remain out of China's immediate technological reach. ACM's listing on the Shanghai Stock Exchange plays directly into China's drive to become technologically self-sufficient in chip making. China and Taiwan already host 42% and 15%, respectively, of new facilities and production lines through 2020.

The wafer cleaning tool market projects out at 10.3% CAGR through 2025 from about $7.4 billion to about $12.1 billion by the end of the forecast period. Micro-Electro-Mechanical Systems (MEMS) used in robotics, drones among other applications coupled with the sheer number of cleaning steps in the fabrication process are key drivers of this growth. Worldwide semiconductor equipment manufacturer billings through the end of the 1st quarter 2020 came to $15.6 billion with China, Japan, Korea, and Taiwan accounting for $12 billion or 81% of worldwide demand. According to third-party estimates and customer feedback, ACM tools appear well positioned to capture over 50% of the global wafer cleaning market. Judging by the value performance spread ACM has built up over the course of the year, investors appear to agree (see Figure 1 above).

This article was written by

Douglas Adams profile picture
Douglas Adams specializes in macro-economic research and turning theory into practical portfolio applications for clients over the past seventeen years. Mr. Adams recently formed Charybdis Investments International based in High Falls, New York where he is the managing director of a fee-only investment advisory practice with clients throughout the United States. As an author, Mr. Adams has commented widely on a diverse array of topics from Brexit to monetary policy to forex to labor productivity and wage growth. He holds an undergraduate degree from the University of California, a master’s degree from the University of Washington and an MBA in finance from Syracuse University.

Disclosure: I am/we are long ACMR, LRCX. 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.

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