Amkor Technology Is Due For A Rebound
Summary
- The Q2 report was better than the Q1 report and it addressed the issue that caused some concerns as to what may lie ahead for AMKR.
- The stock was cruising along until a couple of SEC filings emerged, which caused the stock to drop by double digits in mid-September.
- The recent drop in the stock could be seen as an opportunity to get in, especially with multiples where they are.
- Much has improved and nothing has really gotten worse, which means staying long is warranted.
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The last few weeks have been tough for Amkor Technology (NASDAQ:AMKR). The stock reached its high for the year in mid-September, but it has since fallen off. Insider selling seems to have affected the stock, which had been rolling up to that point. However, the last couple of weeks notwithstanding, there is still reason to be long AMKR. Why will be covered next.
AMKR is coming off a record quarter in Q2 FY2021
In terms of earnings, longs should be glad to hear that AMKR is doing as well as it ever has. AMKR easily beat estimates on the way to what turned out to be a record-setting quarter. Q2 revenue increased by almost 20% YoY to $1,407M, a new all-time high. EPS increased by 121.7% YoY to $0.51, which is also another record.
In terms of end markets, communications grew 6% QoQ to account for 40% of revenue, consumer grew 9% QoQ for a 22% share, computing grew 6% QoQ for a 16% share and automotive, industrial & other grew 4% QoQ for a 22% share. AMKR also increased its FY2021 capex target from $700M to $775M. The table below shows the numbers for Q2 FY2021.
(GAAP) | Q2 FY2021 | Q1 FY2021 | Q2 FY2020 | QoQ | YoY |
Net sales | $1,407M | $1,326M | $1,173M | 6.11% | 19.95% |
Gross margin | 19.4% | 20.0% | 16.4% | (60bps) | 300bps |
Operating margin | 11.0% | 10.9% | 7.4% | 10bps | 360bps |
Operating income | $155M | $144M | $87M | 7.64% | 78.16% |
Net income | $126M | $120M | $55M | 5.00% | 129.09% |
EPS | $0.51 | $0.49 | $0.23 | 4.08% | 121.74% |
(Non-GAAP) | |||||
EBITDA | $295M | $280M | $209M | 5.36% | 41.15% |
Source: AMKR Form 8-K
AMKR set a bunch of new records in Q2, but they’re not expected to remain in place for very long. If the outlook is right, new records should be here as soon as Q3. Guidance calls for Q3 revenue of $1.65-1.75B, an increase of 20.8% QoQ and 25.9% YoY at the midpoint. The forecast expects EPS of $0.60-0.80, an increase of 84.2% YoY at the midpoint. Both would be new records, breaking the old ones set in Q2.
Keep in mind that Q3 tends to be a seasonally strong quarter thanks to the communications segment. Lots of high-end smartphone models are released in the fall, giving Q3 a boost. Still, a sequential increase of nearly 21% in quarterly revenue is six percentage points higher than the average increase of 15% in the last five years. Business is doing well in FY2021.
(GAAP) | Q3 FY2021 (guidance) | Q3 FY2020 | YoY |
Net sales | $1.65-1.75B | $1.35B | 22.22-29.63% |
Gross margin | 18.5-20.5% | 17.8% | 170bps |
Net income | $150-200M | $92M | 63.04-117.39% |
EPS | $0.60-0.80 | $0.38 | 57.89-110.53% |
Management added some color as to what’s driving growth at AMKR. Communications is the main catalyst thanks to rising adoption of 5G. This works for AMKR, especially with communications being its largest market by far. Not only is the number of 5G handsets going up, but the chip content per unit is also much higher. For instance, 5G smartphones need to support a wider range of frequencies than their predecessors, which in turn requires a more complex RFFE with multiple antennas, power amplifiers, filters and so on. From the Q2 earnings call:
“Now, the main catalyst for growth is -- certainly in the third quarter is 5G communication, then IoT, specifically IoT wearables; generally, automotive and in automotive, we see strength in the driver assistance features, and also in the automotive power domain. And then, of course, high-performance computing in general. But if you look specifically into Q3, we see that the communication market is strong. We expect growth both in the volume of smartphones to be sold in the third quarter as well as an increase in the number of 5G handsets to be sold. Comparing to last year, it is expected that this year, 500 million smartphone 5G-enabled handsets will be deployed into the market, which is a doubling compared to last year. And that drives a significant semiconductor content where Amkor has a good position in the RF domain, but also in multiple other components in the 5G smartphones.”
A transcript of the Q2 FY2021 earnings call can be found here.
However, it’s not all roses for AMKR. Like other companies, AMKR is dealing with supply chain disruptions as a consequence of COVID-19, which could have an impact on growth. For example, access to sufficient quantities of substrates is a pressing issue. The costs of materials is another issue to keep an eye on. AMKR had previously pointed to supply chain issues in the Q1 report as a possible factor limiting growth, which actually caused the stock to drop as covered in a previous article.
As good as the Q2 numbers may appear to be, they could have been even better if AMKR was not held back by constraints like the wafer and substrate supply. Supply chain constraints are expected to stick around in the second half of the year.
“The ongoing short-term constraints in the supply chain of materials and equipment are expected to continue into the second half of 2021, and we are working closely with our suppliers and customers to help mitigate these risks.”
In spite of these headwinds, AMKR still expects to outgrow the semiconductor market this year.
“For full year 2021, we expect growth in all end markets, particularly communications. And we are well-positioned to support the continued recovery in automotive. We remain confident in our strong market position and the overall demand environment and expect to outgrow the semiconductor market in 2021.”
As a point of reference, the latest projections from WSTS call for the worldwide semiconductor market to grow by 25.1% YoY to $551B in 2021.
AMKR is in correction territory
The year 2021 has been a good year for AMKR. The stock is up 66% YTD, but it has not done all that well in recent weeks. The stock hit a 52-week high in mid-September, but it then proceeded to lose 13% of its value as shown in the chart below. This pullback seems to be have been caused by insider selling.
Source: finfiz.com
It’s probably no coincidence that the decline started on September 17, the day after the stock hit its high for the year, because on that day a Form 4 was filed that showed the CEO had sold a significant number of shares. Not long after, there was a transfer of ownership of about 2.7M shares involving the Vice Chairman of the board at AMKR.
There are many reasons why top executives or large shareholders decide to sell some or all of their stock. It does not necessarily imply there’s something wrong with AMKR. Nevertheless, the selling does put some doubt in the back of people’s minds, which in turn may cause potential buyers to step away. Furthermore, the very act of putting large numbers of shares up for sale exerts downward pressure on the price of the stock.
The good news is that this is unlikely to last. The selling should subside as there’s only a finite number of shares up for sale, which should ease pressure on the stock as time passes. In addition, AMKR trades at relatively low multiples. For instance, AMKR trades at less than 10 times forward times with a trailing P/E of 13. It has an enterprise value of $6.5B, which is about equal to 6 times EBITDA.
AMKR | |
Market cap | $6.16B |
Enterprise value | $6.51B |
Revenue ("ttm") | $5.46B |
EBITDA | $1.14B |
Trailing P/E | 13.20 |
Forward P/E | 9.69 |
PEG ratio | 0.46 |
P/S | 1.13 |
P/B | 2.41 |
EV/revenue | 1.19 |
EV/EBITDA | 5.70 |
Source: Yahoo Finance
Investor takeaways
The Q2 report was in many ways better than the one that preceded it. That’s not to say that the Q1 report was a bad one. On the contrary, the Q1 report showed many positive signs. Revenue and EPS grew by 15% and 88.4% YoY in Q1. However, the mention of growth being possibly affected by supply chain issues led to concerns about what may lie ahead for AMKR. The stock dropped 12% immediately after the Q1 report.
The Q2 report addressed the issue that seemed to have raised concerns about AMKR. While the supply chain issues are still there and they’re expected to remain throughout the end of the year, they’re not expected to be serious enough to have a major adverse impact if the quarterly numbers are an indication. If anything, for AMKR to grow as strong as it is in spite of the presence of constraints is a testament to the underlying strength in the business.
AMKR expects to outgrow the semiconductor market in 2021, which itself is having a record year. In Q2, revenue and EPS grew by 20% and 121.7% YoY, both record highs. Q3 guidance calls for revenue and EPS to grow by 25.9% and 84.2% YoY. All these numbers could have been even better if not for some constraints. In terms of the quarterly numbers, AMKR is doing absolutely fine. The stock has responded with a gain of 66% YTD.
However, the stock dropped by double digits after reaching its high for the year in mid-September when it was revealed that top executives had sold large numbers of shares. The selling may lead some to suspect there’s something going on, but that does not have to be the case. Selling does put pressure on the price of the stock, but it should not be seen as proof there’s something amiss. Selling is done for many different reasons. Unless something else is revealed, the stock should recover from the recent drop. The decline in the price of the stock could even be considered an opportunity to get in on AMKR at a lower price, especially after the run its had in the last 12 months or so.
I am bullish AMKR. While the insider selling may trouble some, nothing has truly gotten worse for AMKR. In addition, there’s much that has gotten better. AMKR has been able to handle the supply chain issues that caused some to worry after the Q1 report. The Q2 numbers show there’s no reason to be overly concerned.
The latest report shows that the fundamentals are still in place. Advanced packaging still has all the potential in the world. Growth is expected to be even stronger in the second half than the first half. Multiples are very reasonable, especially in today’s market. The stock may be down at the moment, but with strong earnings growth and attractive multiples, the odds are a rebound is in store. Long AMKR is the way to go.
This article was written by
Disclosure: I/we have a beneficial long position in the shares of AMKR either through stock ownership, options, or other derivatives. 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.