ACMR - ACM Research: Growing From Cleaning To Major Equipment Supplier For Semiconductor Manufacturers

Summary

• ACM Research expects to double its SAM through its two new product categories to $16 billion.
• The company has been delivering growing top and bottom-line results over the last five years, beating analyst EPS expectations for the last two quarters.
• ACM Research's stock price has increased by 25.45% in the last month after an upbeat 2023 revenue outlook, although wary of high short interest at 12.27%.
• Cautious of international operations and the impact of geopolitical factors on operations, such as the latest US restrictions and continued US-China chip conflict.

You rarely see a small-cap stock with high-growth potential and impressive and consistent profitability; ACM Research, Inc. ( ACMR ), a semiconductor cleaning company, is doing just that. It has been growing its EPS by 28% annually for the last three consecutive years. Although the stock price dropped 64.04% in the previous year, over the last five years, investors have been rewarded with returns of 540.69%.

The stock price has been on the rise since its confident growth outlook for FY 2023 . With double-digit growth expected for the next several years and a stock price well below its one-year analyst price target estimate of $17.08, there is a lot of upside potential for a firm with a market cap of $613.63 million. Although we have to remain cautious about the impact of the US restrictions on chip companies and the ongoing geopolitical play on the semiconductor industry; ACMR is growing its SAM with new product categories , is investing in significant operational facilities and is expanding its customer base in Asia, Europe and the USA. For this reason, investors may want to take a bullish stance on this stock.

Overview

ACMR started as a manufacturer of cleaning equipment for semiconductor wafers. It was founded in 1998 in California; however, it primarily operates in China. Its main customers are tier-1 chipmakers; however, it is looking to expand its reach. Although most of its revenue is from its cleaning equipment, the company is transitioning into supplying a more comprehensive range of high-end equipment to global semiconductor manufacturers. Below, we can see the breakdown of the company's product mix and impact on total revenue, with its alternative products taking on greater revenue weight.

What is particularly exciting for the next few years is that ACMR's current serviceable addressable market ((SAM)) of $8 billion is expected to double due to new product categories being released. The first is a Chemical Vapor Deposition (PECVD) tool aimed at a part of the semiconductor manufacturing process ACMR has not yet accounted for.

The company plans to invest in growing its operations through new facilities. Its latest production and R&D centre in Lingang, Shanghai, is set to go live in the second half of 2023. Plans to purchase a new headquarters in Shanghai, China. The final stage of selecting a new production facility in South Korea.

ACMR is attractive to investors because it is connected to the high-growth industry of chips without the risk of its very volatile chip prices and the company's well-established footprint in global markets, particularly China, where it plans to purchase a new headquarters in Shanghai.

Financials and Valuation

The company's top and bottom line have been passing analyst expectations for the last two quarters, and performance has been trending upward over the previous four years. ACMR's most recent revenue growth was 100% YoY, reaching $133.7 million, and net income grew even more by 107% to reach $21 million. We can compare that to the US semiconductor industry, which has a revenue forecast of 7.1%, and ACMR's topline is expected to grow on average by 16% per year.

When looking at a small-cap stock, it is essential to look at the company's financial footing. As the company is in a growth phase, it generally has increased cash burn; therefore, we need to look at the liquidity and how it manages its equity and debt financing. I've compared ACMR to two of the most prominent peers in the industry, Applied Materials ( AMAT ) and Lam Research ( LRCX ). We can see that ACMR has a higher current ratio of 2.81 and a quick ratio of 1.79, although it has a recurring negative free cash flow.

Below we can see a breakdown of where the cash is being allocated and why the company has negative free cash flow while producing increasing net income. In the last quarter, CapEx was $13.2 million because of the Lingang facility and other facility constructions. For 2022, the estimated CapEx spending for its facilities is expected to be up to $35 million. In the soon-to-be-released Q4 financial report, more CapEx may be allocated if a deal has been made on a potential new Shanghai headquarters space.

Last quarter the company had $473.2 million in cash, cash equivalents, restricted cash and time deposits, an increase from the prior quarter. The inventory also increased to $327.8 million, the number includes $145.1 million in raw materials, $109.2 million in finished goods and $3.5 million in working processes.

The stock IPOd at $5.60 in 2017 has reached a high of $45.08 and is currently well below its one-year target estimate of $17.08. The company is ranked as a Strong Buy with a rating of 1 by Zacks Rank and the price has increased by 25.27% over the last month, although we should be cautious of the short interest in the stock which is at a high of 12.27%, indicating negative sentiment in the short run. However, I believe there is long-term upside if we compare the valuations of ACMR again to AMAT and LRCX, which are much larger peers. In the table below, we can see a PEG of 0.45 and a price to book ratio of 0.95, indicating that the stock may be undervalued as the market is valuing the stock as less than its total assets. The company has also grown well above the rate of its peers, although it is not as profitable as its larger peers, with lower EBITDA and net income margins.

Risks

As a global player, geopolitical risks play a significant role in the company's performance, with factories and personnel located in the USA and China. The US administration has severely restricted semiconductor exports to China, which will have an immediate impact as 5 to 10% of its tools have components sourced from the US. The company expects customers to pause business before adjusting to the new regulations and how to stay compliant Earlier this year, SEC publicly mentioned ACMR as one of the companies at risk of a potential delisting by the SEC due to non-compliance. However, the company has hired a compliant auditor, and most of its equipment will not be impacted by the restrictions as they are used for trailing edge chips.

Final thoughts

ACMR is going through a severe growth phase and investing heavily in growing its facilities to increase its sales potential. It is well-positioned to take on the booming semiconductor manufacturing industry in Asia while remaining a significant player in its US-based facilities. With new product categories that cater to additional services for semiconductor manufacturing customers, ACMR is doubling its SAM. Its more recent product lines are already growing its revenue, with a lot more upside in place for its newly released products. Investors may want to take a bullish stance on this stock.

For further details see: