ACMR - ACM Research Is Getting Ready To Break The Stalemate

2023-06-13 23:45:02 ET

Summary

• The stock has been basically stuck for months, but there is reason to believe change is coming in the near future.
• ACMR has set the bar high with FY2023 guidance, which has helped its stock, but this could backfire, especially with ACMR falling short of guidance.
• ACMR made a number of decisions to comply with export rules, which could have serious repercussions for ACMR in the long run.
• Long ACMR is worth considering as a short-term play, but for the long term, not so much with the way the cards are laid out.

ACM Research ( ACMR ), a supplier of semiconductor manufacturing equipment, has essentially been on hold for quite some time. The stock got off to a very fast start in 2023, but the last few months have been spent giving back some of the early gains. However, there are signs ACMR may be getting ready to break the current stalemate. Why will be covered next.

The stalemate might be coming to an end

ACMR burst out of the starting block sprinting with a gain of as much as 24.5% on January 3, the very first trading day of 2023. This happened after ACMR issued its initial prognosis of what to expect for FY2023. FY2023 revenue guidance was set at $515-585M, numbers that were well received for a couple of reasons.

First, the numbers implied strong YoY growth compared to the $365-385M expected in FY2022 at a time the industry is contracting. Secondly, it suggested that trade restrictions imposed by the U.S government on chipmakers in China would have a limited impact on the company. Most of ACMR’s customers are in China, a country which contributed as much as 97.2% to FY2022 revenue, which is why U.S. trade restrictions have weighed heavily on the stock. The October 2022 selloff in the stock, for instance, can be attributed to this issue.

The market applauded the news and the stock continued to rally in the following weeks until it hit a 2023 high of $14.40 on February 15, giving the stock a gain of 86.8% for the year at that point. However, the stock lost steam after that, in part due to earnings reports in February and May. Both of the reports showed problems at ACMR with big declines in the top and the bottom line compared to the preceding quarters.

The chart above shows how gains have whittled down in recent months. The stock is still up 38.8% YTD, but that’s down from where it was in mid-February. However, the chart also shows a few other things. Note the trendlines. The lower ascending trendline has prevented the stock from going lower, in effect acting as support for the stock. There were several instances in May alone in which the stock could have broken through the trendline, but support held its ground.

Similarly, the upper trendline is acting as resistance by preventing the stock from going higher. The stock has been stuck between these two trendlines for months, but this looks set to end as the two trendlines are close to converging. This means the stock will either have to break through resistance or risk falling below support.

Either could happen, but the odds are currently in favor of the former. The stock has actually spent the last few days challenging resistance. The stock even managed to move above the upper trendline on June 7 and June 9, although only on an intraday basis as the stock closed back below the trendline before the end of the day on each occasion. Still, the recent price action suggests a break above resistance is likely in the near future.

Valuations favor a move higher

Valuations are a factor that could affect the direction of the stock. For instance, ACMR is valued at slightly below book value with a price-to-book of 0.92, which some might use as evidence ACMR is undervalued and thus worth buying. If one were to guess the most likely direction of the stock based on multiples, then up would probably be the answer for most.

Source: Seeking Alpha

Guidance has helped, but ACMR is falling short of meeting it

As mentioned previously, upbeat guidance from ACMR has greatly assisted in shaping the market’s perception towards ACMR this year. However, it’s worth mentioning that ACMR is currently falling well short of meeting its guidance set forth at the start of the year. FY2023 guidance calls for revenue of $515-585M, but Q1’s revenue of $74.3M is well short of the quarterly run rate needed to meet the low end of guidance at $515M, let alone the high end at $585M.

Q1 shipments are also not good enough at $89M if ACMR is to meet guidance. Granted, ACMR suffered setbacks in its primary market in China in the form of COVID-19, which negatively affected the quarterly results, but there’s no getting around the fact that ACMR is off to a weak start in FY2023. If ACMR is to meet guidance, it will need to make it up fast in the remaining quarters. The table below shows the numbers for Q1 FY2023.

Source: ACMR Form 8-K

Yes, Q1 FY2023 revenue grew by 76% YoY, which might look impressive, but keep in mind that the quarterly results benefited from favorable comps with a very low base in Q1 FY2022. Q1 FY2022 was badly affected by COVID-19 restrictions in China, resulting in a loss for that quarter after a 55.7% sequential drop in revenue. Furthermore, the bottom line in Q1 FY2023 benefited from a $4M one-time gain on the sale of securities.

Revenue and earnings shrank QoQ in Q1 FY2023, the second consecutive quarterly decline after non-GAAP EPS of $0.42 on revenue of $133.7M in Q3 FY2022, both record highs. The assumption is that ACMR will rebound in Q2 and subsequent quarters with the lifting of the Zero COVID policy in China and the numbers will get better as the year goes by. ACMR itself has predicted as such. From the Q1 FY2023 earnings call:

“Our operations in the first quarter were impacted by the several factors, including the COVID policy, the Chinese New Year holiday, supply chain challenging related to U.S. restrictions and some delayed delivery to certain customers. We expect our business to improve in the second quarter, with expected acceleration in the third and fourth quarter.”

A transcript of the Q1 FY2023 earnings call can be found here .

In line with this thought, consensus estimates expect non-GAAP EPS of $0.15 on revenue of $115M in Q2 FY2023. This implies non-GAAP EPS of $0.30 on revenue of $189M in H1, which is still short of the run rate needed to meet FY2023 guidance set out in January. Nevertheless, the numbers are expected to improve in H2 with estimates predicting ACMR will end up with non-GAAP EPS of $0.90-1.07 on revenue of $529-550M at the end of FY2023.

In comparison, ACMR earned $0.65 on revenue of $259.8M in FY2021 and $0.83 on revenue of $388.8M in FY2022. Keep in mind that almost all suppliers of semiconductor manufacturing equipment expect FY2023 to be a down year. For instance, SEMI is predicting a 22% YoY decline in spending on fab equipment in 2023. ACMR, on the other hand, is predicting growth of 41-52% YoY, even though its quarterly numbers are currently nowhere close to that level of growth.

Could ACMR be forced to lower its FY2023 guidance?

Note that ACMR reiterated its FY2023 guidance after both of the two earnings reports this year. Still, there’s no getting around the fact ACMR will need to achieve record-setting performance in H2 to make up for the lost ground in previous quarters. In fact, the quarterly run rate needed in Q2-Q4 to meet guidance, at the low end no less, needs to be ahead of the current record of $133.7M in Q3 FY2022. It's not impossible, but very much a tall order indeed.

Also note that trade restrictions imposed by the U.S. Government still apply. It’s true not all of ACMR’s customers are affected and only some products are not allowed to be shipped. Still, the restrictions have hurt the quarterly results in the last two quarters. Nonetheless, ACMR seems to believe it can make up for it with new customers and possibly with a softening in trade restrictions. The former is possible, the latter less so.

There’s the possibility ACMR will be forced to lower its FY2023 guidance, which could be problematic since this guidance was the main reason why the stock got rolling at the start of the year. ACMR is sticking with its guidance and forward projections are counting on ACMR meeting guidance, but the possibility should not be dismissed, especially since recent quarterly results suggest ACMR is on track to doing exactly that.

Could companies in China be in the process of reducing their exposure to ACMR?

The factors cited by ACMR as to why it has seen its sales and profits fall in recent quarters are all legitimate. Still, it’s interesting to note how other companies in China are not seeing a similar drop, or at least not to the same degree. For instance, NAURA Technology Group is arguably the leading competitor of ACMR in China, at least among local companies, and one of the competitors mentioned by ACMR in its most recent Form-10K .

NAURA reported revenue of CNY4,568.49M, CNY4,675.81M and CNY3,871.13M for Q3 FY2022, Q4 FY2022 and Q1 FY2023, respectively. Operating income in each of these three quarters was CNY1,240.17M, CNY373.53M and CNY735.75M respectively. So while ACMR saw revenue and operating income shrink by 44.5% and 67.4%, respectively, in the last two quarters, NAURA saw its sales and operating income shrink by just 15.3% and 40.7% respectively.

In other words, ACMR has been impacted to a significantly greater extent than its leading competitor in China, even though both were confronted by the same headwinds. A look at the quarterly results of some of the other Chinese companies shows similar results, suggesting there is something that sets ACMR apart from other equipment suppliers operating in China.

The difference was particularly pronounced in Q4 FY2022. Keep in mind COVID-19 restrictions and seasonality with Chinese New Year were not or not as much a factor in Q4 FY2022, unlike Q1 FY2023. Trade restrictions were a factor though in Q4 and the numbers suggest they were much more of a factor for ACMR than NAURA.

A plausibility is that chipmakers in China have not reduced equipment purchases from local companies like NAURA to the same extent as ACMR because the former are seen to be truly homegrown suppliers. In contrast, ACMR is more of a question mark for chipmakers in China. True, ACMR has a local subsidiary that is also listed in China, but ACMR is also headquartered in the U.S.

For semiconductor companies in China that means ACMR is a U.S. company, not really all that different from companies like Applied Materials ( AMAT ) or Lam Research ( LRCX ). ACMR’s decision to fully comply with export controls imposed by the U.S. government further strengthens this viewpoint. ACMR’s recent decision to drop its China-based auditor in favor of a U.S.-based one at the behest of the U.S. government is likely to have strengthened the belief among companies in China that ACMR is not one of their own.

This could hurt ACMR’s growth prospects in China since Chinese chipmakers are likely to prefer suppliers that are not beholden to the U.S. government. In the long run, ACMR could see its market share shrink in China as most if not all its customers switch to suppliers that will not restrict the kind of equipment they can acquire but are willing to conductor business as before without any conditions.

Investor takeaways

The stock has essentially gone sideways in recent months because it found itself caught between support and resistance. However, the stalemate is likely to end in the near future since the trendlines are converging and the stock will no longer be able to respect the boundaries imposed by both trendlines. The stock will have to move higher by breaking through resistance or move lower by breaking through support.

While both are possible, the odds favor the former. It is resistance and not support that is being challenged at the moment. ACMR comes with relatively low valuations in certain respects, which make it more likely the stock gets bought than sold. The stock is at the lower end of the trading range it has been in the last five years, which also favors a move higher with ACMR closer to the bottom than the top.

With that said, I would still not be a buyer of ACMR as stated in a previous article . The stock is more likely to move higher than lower in the short term, but there is also reason to believe ACMR could be heading for disappointment later in the year if or when it becomes clear FY2023 guidance is too optimistic. ACMR has set the bar high with its FY2023 guidance at a time when the industry is contracting, which has helped the stock soar higher in 2023, but this also means the odds of falling short of expectations are high.

ACMR is currently well short of meeting its targets set forth at the start of 2023, which is no good since the stock is priced based on forward projections that expect ACMR to show strong growth in line with guidance. It’s not impossible for ACMR to meet guidance since there is time left, but ACMR has its work cut out. The bar has been set high.

In addition, ACMR’s goal of expanding its market share inside and outside of China may not be attainable due the current state of U.S.-China relations. ACMR seems to want to keep its access to the U.S. market by complying with rules imposed by the U.S. government, but ACMR runs the risk of alienating its customers in China by doing so.

The U.S. has limited Chinese access to semiconductor manufacturing equipment, and as a result, Chinese companies are in need of suppliers that will not restrict equipment whenever the U.S. says so. ACMR has basically shown that it is not the answer since it cannot deliver what its Chinese clients want. If anything, Chinese companies may come to decide, if they haven’t already, that ACMR is not only not an alternative to companies like AMAT or LRCX, but actually a supplier for which they too need an alternative.

This won’t happen overnight since qualifying a new supplier or equipment takes time, but the process may have already started if the disparity between ACMR and Chinese companies like NAURA is any clue. The more likely scenario is for ACMR to see weaker-than-expected growth as companies in China think twice about selecting ACMR as their supplier. Longer term, ACMR is likely to lose market share as its customers in China replace it with another supplier they can depend on.

ACMR derived 97.2% of its revenue from China in the last fiscal, which suggests ACMR could stand to lose a great deal if or when Chinese companies decide to replace ACMR with another supplier that is truly local and not subject to export controls like ACMR is. ACMR can still grow outside of China, although it won’t have the same advantages that it did in China, but the goal of $1B in revenue in China might not be achievable with this in mind.

Bottom line, AMCR may be okay for a short-term trade, but those looking for something long term may want to think twice. While the stock is likely heading higher in the short term, ACMR’s long-term prospects are built on a shaky foundation. In the worst case, ACMR could see its market share shrink in China, if not evaporate entirely, while it also fails to make headway against established incumbents like AMAT and LRCX outside of China. If this happens, watch out below.

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