ACMR - ACM Research: Gonna Wash That Yuck Right Off O' That Chip

2023-09-18 10:51:20 ET

Summary

• Taiwan Semiconductor Manufacturing Company has asked some suppliers to delay the delivery of chip making support due to concerns about customer demand.
• Taiwan Semiconductor is also delaying the start of production at its new plant in Arizona due to a shortage of skilled workers.
• ACM Research, Inc., a company that supplies Taiwan Semiconductor, has seen its shares plunge for three reasons, including the above.
• I believe the selling is overdone.

Semiconductor stocks took it on the chin this week. According to Reuters, our former (and likely future) holding of Taiwan Semiconductor Manufacturing Company Limited ( TSM ) quietly told some of its suppliers to delay the delivery of high-end chip-making equipment because of concerns about customer demand.

The ripple effect from this simple request created a tsunami. There are scores of listed companies that supply TSM (and the rest of the semiconductor manufacturing companies) with all kinds of technical, operating, maintenance, and quality control offerings and innovations.

TSM also announced, earlier, that it was delaying the start of production from its new plant being built in Arizona to 2025 from 2024. Their biggest concern seems to be a dearth of the skilled workers required for their high-end equipment installation. The company has been sending technicians from Taiwan to train local workers. Still, any reduction in demand for the products TSM provides to the likes of Apple (AAPL) and Nvidia (NVDA) will only push the construction further forward.

I see both events as simply good use of capital by TSM. Conserve cash in the areas you can when demand is down and be ready to spring back at the first hint of renewed demand. I see this as merely a short-term pullback in demand.

I do not see a serious shift in semiconductor demand this year, next year, or most likely for the next few years. After that, the taxpayer money being thrown at companies by many nations, including the USA, may provide a glut that will mean more sales but lesser earnings - which would then lead to falling share prices.

Among the many companies affected by this temporary slowdown is one I have been reviewing and have purchased for some clients and myself. The company is ACM Research, Inc. (ACMR). The shares have plunged this past week from $19.01, where I started buying, to $15.52, where I bought my largest tranche.

The decline specific to ACM seems to have been caused by three events - or possible events. First, of course, was the knee-jerk reaction of TSM telling at least some suppliers that it would not need as much of their supplies or services as TSM originally thought it would need.

The second, however, is unique to ACM. David Wang, the CEO, president, and 10% owner of the company, sold a little over 175,000 shares of his roughly 1.45 million owned shares. We never know "why" insiders sell. Maybe he wanted to buy a new mansion or buy some shares of TSM if it declines further, or maybe he believes the stock got ahead of where he thought it should be valued. Or maybe he knows some deep dark problem with ACM's products and services

Since he still holds some 1.25 million shares, I am willing to believe that, just like you and me, he sometimes understands it is smart to take a little something off the table and put it in your pocket - even if you are still in the game.

The third potential risk is the risk of the U.S. or the EU placing sanctions on U.S.-based companies doing any kind of business with the People's Republic of China. This to me presents ACM's biggest challenge. While it is headquartered in the U.S. (Fremont, California), ACM derives most of its current revenue from Chinese company clients.

If ACM were to be proscribed via sanctions from doing business with China, this could mean a huge hit to their revenue stream. China owns 5% of the company's shares and in the most recent year accounted for the lion's share of ACM's revenues.

ACM seems to be quite aware of the potential risk of U.S. or EU sanctions. The company is now securing more orders from other nations, including the U.S. Of course, unless sanctioned, the fact that China must now rely more on its own manufacturing rather than buying finished products from overseas might actually work in ACM's favor.

What Makes ACM Unique?

With those three risk factors in mind, ACM still occupies a unique niche in the semiconductor arena. What does ACM do? Basically, it gets most of its revenue from washing silicon wafers. Okay, that is not terribly technical, but it is a bit more difficult - and difficult to comprehend - than using some analogy like running your car through a car wash. Here is the next level of explanation…

A condensation of what the company says on its website and in its presentations is that it provides single-wafer wet cleaning equipment for enhancing the manufacturing process and yield for integrated circuits (ICs.) It does so using something called Tahoe technology (which first drew my attention) as well as other advanced technologies to deliver cleaning performance using less sulfuric acid and hydrogen peroxide. ACM also provides electrochemical plating technology for advanced metal plating.

The company or companies that provide the most advanced cleaning technologies will always be in demand because it means fewer defects for the final product and fewer wafers that must be rejected. Getting as close to 100% of all IC chips perfect as possible is every manufacturer's goal. With fewer defects after a good cleansing, the manufacturers using ACM's services do so because they see better results.

ACM also produces other equipment for many other applications in integrated circuits and wafer-level packaging, and it provides coating, wet stripping, scrubber, and plating systems. But the bulk of their efforts are still in IC wet-cleaning.

The next level of description comes from Morningstar:

"ACM Research…is engaged in developing, manufacturing, and selling single-wafer wet cleaning equipment, which is used by semiconductor manufacturers in numerous manufacturing steps to remove particles, contaminants, and other random defects to improve product yield, in fabricating integrated circuits, or chips. The company offers space alternated phase shift which employs alternating phases of megasonic waves to deliver megasonic energy to flat and patterned wafer surfaces on a microscopic level; and Timely Energized Bubble Oscillation technology which provides effective, damage-free cleaning for both conventional two and three-dimensional patterned wafers at process nodes."

The author of that description at Morningstar may know precisely what all that means. Certainly the company's website and August 2023 Investor Presentation provide some insight, though most third-party sources I have identified merely parrot what the company itself says!

ACM's Global Footprint:

The company's products & services:

And here is a rather more thorough description of what makes ACM's approach unique, from semianalysis.com.

"The ACM Research SAPS wafer cleaning tool is a single wafer cleaning tool, but with a key innovation. It utilized megasonic acoustic vibrations through the fluid bath to produce bubble oscillations which assisted with cleaning defects. Other manufacturers had introduced megasonics in the past, but a key issue was that as bubbles collapse, the resulting energy would often damage features on the chip. ACM Research also introduced space alternate phase shift ((SAPS)) which alternated the phases of the megasonic waves so that the energy delivered to the wafer was uniform and caused less pattern damage. Even with these innovations, SAPS is not currently used in any leading edge FinFET process by Samsung, Intel, or TSMC due to pattern collapse. ACM Research also has a similar technology known as TEBO (Timely Energized Bubble Oscillation) which has seen success in SK Hynix and YMTC NAND processes."

I am certain a lively band of commenters who understand the business in far greater depth than I, can provide more pros and cons. For me, in this industry, I am seeking the golden mean of simplicity: ACM Research seems to have an innovative, multi-patented leading position against competitors like Lam Research ( LRCX ) and Tokyo Electron. Intel ( INTC ) certainly seems to think so - industry scuttlebutt is that Intel is funding some of the most advanced of ACM's products for their own use.

And a back-of-a-business-card sentence to sum up my interest in the company: ACM Research is a cutting-edge technology firm that "washes" wafers via a special process that results in fewer defects and thus better profits for semiconductor manufacturers.

I consider ACM a speculative purchase for a small position in one's portfolio. Do not expect immediate "action." However, given the decline in the price of the shares it is important to note that ACM's 5-year trailing PE has been just above 40, right in line with the rest of its industry peers. But at today's price, ACM sells for just 16 times trailing earnings, roughly half that of the semiconductor industry as a whole. Innovation on the cheap? You decide for yourself. Me? I am a buyer at these prices.

Intelligent investing,

Unless you are a client of my portfolio management firm, Stanford Wealth Management, I do not know your personal financial situation. Therefore, I offer my opinions above for your due diligence and not as advice to buy or sell specific securities.

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