Why Ultra Clean Is A Stock To Buy From Here

Summary

  • Ultra Clean Holdings issued guidance within analyst expectations.
  • Temporary supply disruptions hurt near-term results.
  • Technical chart read suggests the stock bottomed.
  • Looking for a helping hand in the market? Members of DIY Value Investing get exclusive ideas and guidance to navigate any climate. Learn More »
3D rendering of cyberpunk AI. Circuit board. Technology background. Central Computer Processors CPU and GPU concept. Motherboard digital chip. Tech science background. Integrated communication processor.

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Investors who bought Ultra Clean Holdings (NASDAQ:UCTT) last summer profited if they sold at the $60 peak. At its peak, UCT stock rose when investors piled into technology stocks. The semiconductor company traded within the $58.22 - $80.33 fair value range due to market sentiment. This year, markets are selling chip stocks whenever the sector tries to rally. Digging deeper, Ultra Clean missed first-quarter estimates. It issued Q2 guidance within consensus estimates.

How should investors interpret the contradictory results and outlook?

Strong Demand In First Quarter 2022

In Q1/2022, UCT posted revenue growth of 35.08% Y/Y to $564.14 million. Chief Executive Officer Jim Scholhamer said that the industry is in a period of secular growth and increasing demand. In the last quarter, the non-GAAP gross margin was 20.5%, down slightly from 21.5% in the prior quarter. On the conference call, the firm said that China’s airline crash situation in the period and lockdown pressured margins. It will also see some pressure in the second quarter. As the year unfolds, Ultra Clean expects gross margins to return to historically strong levels.

UCT said the manufacturing lockdown and logistics delays in China prevented it from shipping around $41 million.

Ultra Clean Geographic revenue

UCTT Q1/2022 presentation

Slide from Q1/2022 Earnings Call Presentation

As shown above, the company has geographic diversity. Its total available market is $680 billion in 2022 in the chip market. UCT services are worth $1.6 billion and UCT products are worth $35 billion.

Opportunity

Ultra Clean may increase its share in manufactured components. As its penetration rises for over 10% of customers, revenue will expand. The company will engage with smaller customers. They produce high-growth devices in the IoT, automotive, and 5G space. Those are smaller markets for UCT at this time. To expand margins sooner, the company will grow its WFE market.

By the second half of this year, UCT may realize around $2.5 billion worth of business. It has design wins. Its customers are launching new fabs regularly. That includes companies like Intel (INTC). As its partner, UCT will provide support, fueling growth for both firms.

Catalyst

Ultra Clean’s low capacity utilization in Shanghai hurt its results. Due to the month-long lockdown, it operated at a 40% capacity utilization. Investors may wait for China to re-open factories. Already, Covid cases are dropping. This month, UCT will bring all its employees back.

In its Q2 outlook, UCT expects revenue in the range of $550 million to $630 million. It will earn between 60 cents to 92 cents a share.

Stock score on UCTT

SA Premium

The scores above factored in the company’s recent slowdown. Growth and profitability scores fell. When the stock traded at 52-week lows, valuation reached favorable levels. UCT stock scored an A grade on value.

UCT posted a revenue target range dependent on gross margin. At 24%, its revenue could reach up to $4.0 billion. Conversely, at an 18% gross margin, it may post revenue as low as $1.5 billion:

Ultra Clean consolidated performance model

UCTT

Risks

Ultra Clean’s stock chart indicates the risk areas. On several occasions in the last month, selling volume spiked. The stock fell as a result:

UCTT stock and MACD

stockrover.com

The stock is stuck in a sustained downtrend. This is consistent with Nasdaq’s behavior. For example, UCT stock rallied in March buyers bought the dip in Nasdaq. More recently, buyers stepped in at the beginning of the month.

The moving average convergence divergence signals bullishness. Investors are attempting to pick the stock’s bottom. Technical traders should watch for the faster-moving blue line moves above the slower green line.

Ultra Clean stock could stage a technical rally back to near $40. This is the 50-day simple moving average. If it breaks out above that, $45-$47 is the next resistance level at the 100-200 day moving average.

Related Investments

Lam Research (LRCX) and Applied Materials (AMAT) are two of UCT’s customers.

UCTT Q1/2022 revenue

UCTT Q1/2022

According to SA Premium quant scores, those firms offer higher profitability. They score an A+ on that measure:

Stock scores

SA Premium

On the chart, LRCX’s MACD is forming a positive uptrend. This suggests the stock is setting up for a rally.

LRCX chart price and MACD

LRCX chart (Stockrover.com)

Applied Materials also shows the same pattern on the charts:

AMAT stock chart

Price and MACD on AMAT stock (Stockrover.com)

The chart is not the only reason to consider Applied Materials. In March, the company raised its dividend by 8.3% to 26 cents a share. It also authorized a $6 billion stock buyback. Investors should buy companies that seek ways to increase shareholder returns. When market turbulence eases, AMAT stock is likely the first chip stock to rebound first. It has a healthy backlog. For example, its semi-systems backlog was $8 billion. It grew by more than$1.3 billion in the first quarter. Its large backlog will continue into 2023.

In the last quarter, Lam Research posted revenue growing by 5.5% to $4.06 billion. Investors expected more from its outlook. Still, supply chain issues disrupted its momentum. Once it eases, LRCX stock will rebound.

Your Takeaway

Investors should build a position in the semiconductor sector. Companies face a temporary slowdown. This is due to the supply disruption and China’s unexpected lockdown in Shanghai. Expect UCT to rebound this year.

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This article was written by

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Disclosure: I/we have no stock, option or similar derivative position in any of the companies mentioned, and no plans to initiate any such 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.

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