ACM Research Maintains A Tricky Balancing Act
Summary
- ACMR scored numerous gains in FY2020, including double-digit growth and laying the groundwork for future growth with new products and customers.
- ACMR relies heavily on China for growth with three customers in China accounting for 76% of its revenue, a point of major concern.
- ACMR trades at a premium over the competition, but that depends on ACMR sustaining the fast growth afforded to it by China.
- The possibility of having it all taken away by U.S. sanctions hangs over ACMR, seriously dampening the bull case.
ACM Research (NASDAQ:ACMR) concluded what can be described as a productive year in FY2020 with the release of the Q4 quarterly report. Revenue and EPS grew by double digits. New products were launched and new customers presented themselves. However, in spite of all the good news, concerns hanging over ACMR were proven to be not without merit Why will be covered next.
Q4 FY2020 quarterly report
The Q4 report beat estimates. Q4 revenue increased by 85.2% YoY to $45.6M and non-GAAP net income increased by 35.5% to $6.2M. Note that there was a $3.6M unrealized gain on trading securities in Q4. This boosted the GAAP numbers for net income and EPS, but are absent in the non-GAAP numbers.
Tax items and foreign exchange fluctuations raised non-GAAP EPS by $0.05 in Q4 FY2019, but this benefit dropped to $0.04 in Q4 FY2020. If there had been no change, EPS would have increased by 30.4% YoY instead of the 26.1% it turned out to be.
Gross margins were significantly lower compared to a year ago, but within ACMR's targeted range of 40-45%. The fluctuations in margins were expected and are due to quarterly changes in product mix and manufacturing utilization. The table below shows the numbers for Q4. Keep in mind that Q3 is the strongest quarter of the year for ACMR, skewing the QoQ comparisons with Q4, which tends to be weaker than the third quarter.
(GAAP) | Q4 FY2020 | Q3 FY2020 | Q4 FY2019 | QoQ | YoY |
Revenue | $45.562M | $47.665M | $24.608M | (4.41%) | 85.15% |
Gross margin | 43.2% | 42.7% | 50.6% | 50bps | (740bps) |
Operating income | $5.432M | $7.506M | $3.849M | (27.63%) | 41.13% |
Net income | $8.529M | $8.627M | $3.944M | (1.14%) | 116.25% |
EPS | $0.39 | $0.40 | $0.19 | (2.50%) | 105.26% |
(Non-GAAP) | |||||
Revenue | $45.562M | $47.665M | $24.608M | (4.41%) | 85.15% |
Gross margin | 43.3% | 42.8% | 50.7% | 50bps | (740bps) |
Operating income | $6.737M | $10.285M | $4.502M | (34.50%) | 49.64% |
Net income | $6.230M | $8.969M | $4.597M | (30.54%) | 35.52% |
EPS | $0.29 | $0.42 | $0.23 | (30.95%) | 26.09% |
Source: ACMR Form 8-K
With the Q4 numbers available, so too are the numbers for FY2020. FY2020 revenue increased by 45.7% YoY to $156.6M and non-GAAP EPS declined by 4.3% YoY to $1.12. However, it's worth pointing out that tax items and foreign exchange fluctuations totaling $4.7M raised EPS by $0.25 in FY2019. These amounts fell to $0.9M and $0.04 per share in FY2020. EPS would have registered a YoY increase and not a decline if this had not been the case.
FY2020 revenue was up by 45.7%, but actual shipments increased by 58% YoY from $115M in FY2019 to $182M in FY2020. Remember that ACMR does not recognize revenue immediately, but only after shipments have been accepted by the customer. Revenue from wet cleaning and other front-end processing was 87%. The remainder came from advanced packaging, other back-end processing tool services and spares. The table below shows the numbers for FY2020.
(GAAP) | FY2020 | FY2019 | YoY |
Revenue | $156.624M | $107.524M | 45.66% |
Gross margin | 44.4% | 47.1% | (270bps) |
Operating income | $21.492M | $17.791M | 20.80% |
Net income | $18.780M | $18.894M | (0.60%) |
EPS | $0.89 | $0.99 | (9.10%) |
(Non-GAAP) | |||
Revenue | $156.624M | $107.524M | 45.66% |
Gross margin | 44.5% | 47.3% | (280bps) |
Operating income | $27.120M | $21.363M | 26.95% |
Net income | $23.793M | $22.466M | 5.90% |
EPS | $1.12 | $1.17 | (4.27%) |
Q4 FY2020 earnings call
With FY2020 behind us, management had some thoughts on what FY2021 could look like. The forecast expects FY2021 revenue of $205-230M, an increase of about 39% at the midpoint. From the Q4 earnings call:
"Our values reflect optimism about our growth prospects for 2021. The report that we offer preliminary guidance in early January, which is unchanged. We expect revenue to be in the range of $205 million to $230 million, which present 39% annual growth in cleaning business.
Our outlook 2021 is based on several key assumptions. First, the global COVID-19 situation improves in the coming months; second, U.S.-China trade policy stabilize; third, a range of spending scenarios for the production lending of key customers; fourth, variance in the trajectory of DRAM recovery; and finally, a range of outcomes for the timing of customer acceptance of the first tool."
A transcript of the Q4 FY2020 earnings call can be found here.
ACMR also managed to score gains in other areas. For instance, ACMR expanded its customer base in FY2020 and it increased the number of products it has to offer. FY2020 saw the launch of several new product lines, including furnace, semi-critical cleaning, ECP and advanced packaging. This is expected to continue in FY2021.
"this year, there's more new customers coming in, especially, we have a new product in SAPS, and also our Furnace product and also additional new customer come in"
Total addressable market could double in a couple of years thanks to these initiatives from ACMR.
"For 2021, to prepare for new opportunity ahead, we plan to accelerate our R&D to about 14% of our sales, redoubling total market addressed by our products from $5 billion today to more than $10 billion. We are too early to offer details. I can see that our team has begun work on serving new major products that can get us close to the $10 billion addressable market growth in the next couple of years."
Most of ACMR's current customers are companies that lag behind the market leaders. But ACMR is confident it can secure wins with some of the leading semiconductor companies in the U.S. and Taiwan in 2021.
"The team is actively building a sales pipeline with regular engagement, such as technology discussion in the U.S. and the Taiwan players. We are confident that, in fact, TEBO, Tahoe and high-speed copper plating as well as SAPS, we can secure wins at one or more major first-tier of customers during 2021."
These attempts to diversify and find new markets are not without reason. ACMR depends heavily on the Chinese market. As such, ACMR is vulnerable to trade sanctions imposed by the U.S. government on China. Something that could potentially become a major problem for ACMR. A previous article covers this issue in greater detail.
ACMR remains heavily exposed to China
According to the latest Form 10-K, just three companies in China accounted for 76% of revenue in FY2020. HLMC led the way by growing 103% YoY to account for 37% of revenue. YMTC came in second with a share of 27% after increasing revenue by 42% YoY. SMIC replaced SK Hynix as one of three customers in FY2020 with more than 10% of revenue. The latter had accounted for almost 20% in FY2019, but fell into the single digits in FY2020. SMIC did the opposite by going from single digits to 12%. ACMR has several other Chinese customers.
Unfortunately for ACMR, one of these three companies has been sanctioned by the U.S. government. ACMR expects much less contribution from this customer in FY2021 as a result.
"While it's in Shanghai and the flexibility to deliver SMIC, our business level also depends on other new suppliers to gather license to ship their own tools to AMC. We are well positioned with a range of the tool SMIC, but are factoring in just a small amount from SMIC in our 2021 outlook."
ACMR also had an update on the IPO it has been pursuing in Shanghai. The IPO has now been delayed due to legal action.
"events in the U.S. caused a delay in IPO. It is stated with the short sale report issued on October 8, 2020, followed by a class-action lawsuit by December 21, 2020. We have previously discredited our disagreements with the short seller report, and we, therefore, believe there is no substance to losses, which is largely based on the short sale report."
Remember that ACMR was the target of some serious allegations. A previous article covers this in more detail.
ACMR vs. the competition
The threat of being deprived of some or all of its customers in China seems to have greatly affected ACMR. While the stock had a fantastic year in 2020 by appreciating over 300%, performance was uneven as shown in the chart above. The stock rocketed higher in the first half, but it has gone sideways starting in the second half when rumors of U.S. sanctions against semiconductor companies from China surfaced. The stock remains where it was in mid-2020 despite some big ups and downs.
ACMR | AMAT | LRCX | |
Market cap | $1.76B | $108.69B | $81.05B |
Enterprise value | $2.03B | $106.90B | $81.72B |
Revenue ("ttm") | $156.62M | $18.20B | $11.93B |
EBITDA | $22.52M | $5.25B | $3.71B |
Trailing P/E | 105.48 | 28.33 | 28.16 |
Forward P/E | 38.32 | 18.18 | 21.47 |
PEG ratio | 3.30 | 0.91 | 0.98 |
Price/sales | 11.21 | 5.97 | 6.79 |
Price/book | 12.44 | 9.47 | 14.76 |
EV/revenue | 12.97 | 5.87 | 6.85 |
EV/EBITDA | 90.16 | 20.37 | 22.04 |
Dividend yield | N/A | 0.75% | 0.91% |
Source: Yahoo Finance
The rally from earlier in the year has stalled. This helped narrow the gap in terms of valuations that exists between ACMR and some of its biggest peers. For instance, Applied Materials (AMAT) and Lam Research (LRCX) supply some of the same semiconductor manufacturing equipment. The table above shows how the three companies stack up.
ACMR still trades at a premium with higher multiples than the other two, although the gap is not as extreme as it used to be say six months ago. To justify paying these multiples, ACMR will have to grow much faster than its competitors. The problem here is that ACMR relies on China for its growth. Chinese companies that could be cut off from ACMR by the U.S. government at any point in time, something that has already happened. ACMR is growing very fast, but there's no telling if that will last.
Source: Wikimedia Commons
Investor takeaways
ACMR is in a very tricky situation. The company is growing very fast. New customers are being added, as are new products. Everything looks fine except for the fact that it depends heavily on China. Chinese companies have enabled very fast growth at ACMR, but that growth is at risk of grinding to a sudden stop if the U.S. government imposes new trade restrictions on China.
One of its three biggest customers contributing 10% or more to revenue has already been affected. It's quite possible other companies from China could follow in its footsteps. A U.S. national security commission recently recommended clamping down on the supply of semiconductor equipment to China. That's no good for anyone supplying those companies in China.
All it takes is for two companies in China to be sanctioned and ACMR could lose more than half its revenue. Having revenue cut in half would definitely impact the stock, especially with ACMR trading at fairly high multiples. ACMR comes at a premium, but that depends on growth continuing uninterrupted. If that goes away, ACMR could fall as quickly as it rose in 2020. ACMR is a growth story. No growth means there's no story either.
I am neutral on ACMR. While the company presents a number of compelling arguments in favor of long ACMR, it also carries the risk of having it all taken away rather quickly. Yes, there's fast growth. It's true ACMR is adding new customers and new products. But all that relies on access to China, something ACMR has no control over. That could change in the future, but that's the way it is right now. ACMR would do well to find new customers outside of China, something it is working on. Until then, it's best passing on ACMR.
This article was written by
Analyst’s Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. 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.
Seeking Alpha's Disclosure: Past performance is no guarantee of future results. No recommendation or advice is being given as to whether any investment is suitable for a particular investor. Any views or opinions expressed above may not reflect those of Seeking Alpha as a whole. Seeking Alpha is not a licensed securities dealer, broker or US investment adviser or investment bank. Our analysts are third party authors that include both professional investors and individual investors who may not be licensed or certified by any institute or regulatory body.
Recommended For You
Comments (7)
The main point and potential shortfall of revenue belongs to the supported technology (advanced node capacity) AND the customer. So as you can see in the ACMR 10Q SMIC is still a customer.
Further on, there are new licenses for SME companies to support SMIC - see ENTG. But of course there are delays to grant deliveries for AMAT and LRCX.
By the way, the risk of revenue with SMIC was estimated by Goldman with 10% rev 4Q 2020.
The stockprice reduction was driven by postponed STAR Board listing and sell off in high techs. Still the (12m) TP from the wall street is in a range of 120 - 150 USDBest luck to your DD and stay save