AMKR - Amkor: On The Verge Of A Breakout

2023-12-11 05:22:02 ET

Summary

• Amkor is the world's second largest OSAT provider, serving various industries worldwide.
• AMKR stock has been range-bound, fluctuating between $20 and $30, for the past year, but we expect a breakout soon, driven by several positive factors that will boost its growth.
• We see Amkor as a solid mid-cap investment option, as it trades on lower multiples than its peers with a strong balance sheet and a positive financial outlook.

Investment Thesis

Amkor ( AMKR ) is a leading provider of outsourced semiconductor assembly and test services (OSAT), serving customers across various segments such as 5G, AI, IoT, automotive, and data center. The company has a strong presence in North America, Europe, and Asia-Pacific regions, with 15 manufacturing facilities and over 31,000 employees worldwide.

Trading at 1.1x revenue and 6.3x EBITDA , Amkor presents an attractive investment opportunity. The stock has been range-bound, fluctuating between $20 and $30, for the past year, but we expect it to break out soon, driven by several positive factors that will boost its growth. These factors include:

• The increasing demand for AI chips, which require advanced packaging solutions to enhance their performance and efficiency.
• The positive trajectory of advanced chip packaging, which is a key differentiator in the semiconductor industry.
• The anticipated semiconductor market recovery in 2024, after a decline in 2023.
• The support from the US government's CHIPS Act, which aims to incentivize semiconductor manufacturing in the US.
• Reshoring trend of semiconductor manufacturing as a result of deglobalization and geo-political risk.

We believe that the market will recognize Amkor’s growth prospects and make its stock eventually surge higher, driven by the powerful catalysts that we will discuss in this article. We recommend buying Amkor stock, as we see a significant upside potential for this high-potential company.

OSAT Market

As per Mordor Intelligence, the OSAT market size is expected to grow from $43.36 billion in 2023 to $64.01 billion by 2028, at a CAGR of 8.10%.

The growth of the OSAT market is driven by factors such as increasing demand for advanced packaging technologies, rising investments in new chip manufacturing facilities, growing adoption of miniaturization and efficiency in semiconductor products, and outsourcing trends in the semiconductor industry.

The OSAT market is highly competitive and consists of many players where Amkor and ASE are the market leaders. Among the worldwide top 10 OSAT vendors, there are six from Taiwan, three from China, and one form the United States, with a total market share of 80.1%. Vendors in Taiwan include ASE, PTI, KYEC, Chipbond, ChipMOS, and Sigurd; vendors in China include JCET, TFME, and Hua Tian. The only US vendor is Amkor (see below)

Catalyst: Reshoring Semiconductor Manufacturing

Globalization has ended. The prior environment of frictionless trade and the free movement of capital, people, information etc. is over, and the global economy is currently in a period of deglobalization. A key outcome of the deglobalization trend is reshoring where companies are bringing their production and manufacturing facilities back home to strengthen their local economies.

We think that Amkor, as the only major western OSAT company, will be a beneficiary of the reshoring trends in the semi industry. Amkor has a unique advantage amongst its peers with its wide geographic presence in Asia, US, and Europe, where it can offer its customers reliable and cost-effective packaging. Amkor’s location advantage also gives it a competitive edge over its rivals as it can help US and European companies to reduce their exposures to politically sensitive markets such as Taiwan or China.

Catalyst: The Rise of Advanced Chip Packaging

AMD’s MI300X super AI chip is the latest hot topic in the semi industry, as it boasts a 60% performance advantage over NVIDIA’s flagship H100 chip, according to AMD. The MI300X is the first chip that can fit an entire 80-billion parameter model in memory, which reduces the number of GPUs needed and improves the efficiency and speed of training and inference.

Industry experts believe that packaging is the key to advancing compute, and the MI300X and its brother MI300A are the best examples of this. Advanced chip packaging has become a critical enabler for emerging applications such as AI and IoT. These applications require high-performance, low-power chips that can rapidly process massive amounts of data at high speeds. However, traditional technologies that rely on metal wires to connect chips are limited by their performance, reliability, power consumption, and cost.

Advanced chip packaging offers a solution to these challenges by integrating multiple chips into a single package, using technologies such as flip-chip, fan-out, and 3D stacking. These technologies enable higher density, functionality, and performance, as well as lower power consumption and cost, for semiconductor products.

As the world’s second largest OSAT provider, Amkor has a strong position in the growing market for advanced chip packaging. The company has invested in various packaging technologies, that improve the performance, power efficiency, size, and functionality of the chips. Amkor has also collaborated with leading players in the semiconductor industry, such as foundries, and OEMs, to deliver customized packaging solutions for their specific needs.

Our view is that Amkor is well-positioned to capitalize on the growing demand for advanced chip packaging and we believe that this trend will help increase Amkor’s growth, and valuation in the next few years.

Catalyst: Semiconductor Market Recovery Expected in 2024

The overall semiconductor market performance has a strong impact on Amkor’s business. It is forecasted that the global semiconductor market will shrink by 9.4% in 2023, reaching $520 billion this year. This is because of a lower demand for all types of semiconductors, across most of the regions and categories.

However, there is optimism for 2024, as most research firms have improved their market projections for an industry recovery. According to WSTS , global semiconductor market is projected to rebound strongly with double-digit growth projected for 2024. The estimates indicate a 13.1 percent increase, reaching a valuation of $588 billion (see below)

Also, Gartner is projecting semiconductor revenue to grow 17% in 2024 to total $624 billion. Gartner says that the rebound will be driven mainly by AI workloads and increased memory demand.

Catalyst: Amkor Announces US Largest OSAT Facility

On November 30, 2023, Amkor announced its plan to build a domestic OSAT facility in Peoria, Arizona. We think that this $2 billion investment announcement is a clear indication of Amkor’s expansion plan to increase its market share and leadership position in the OSAT industry. The company expects that the new facility will help it meet the growing customer demand for the US semiconductor and foundry investments. Ankor also hopes to leverage its strong relationship with Apple to secure more orders and increase its market share in the advanced chip packaging industry.

We see the Arizona OSAT investment as a very strategic move that will give Amkor a long-term competitive edge over its rivals. The new facility will enable Amkor to offer more advanced and customized packaging solutions to its US customers, and gain market share in the high-growth segments of 5G, AI, and IoT. In addition, the facility will help US companies to reduce their dependence on other countries and build a more resilient semiconductor supply chain. Furthermore, we also think that this strategic investment will enhance Amkor's reputation and brand value.

Financials - Outperforming the Semiconductor Industry Decline

The company reported solid financial results for the third quarter of 2023, with net sales of $1.82 billion, up 25% sequentially and down 12% year-over-year. The company attributed the sequential growth to the strong performance of its communications end market, which reached a new record. The company also achieved gross margin of 15.5%, operating margin of 9.1% and an EPS of $0.54. The company's EBITDA was $333 million, representing an EBITDA margin of 18.3% (see below)

The company's Q4 guidance reflects its confidence in the continued demand for its services although the overall macroeconomic environment continues to stay weak. The company expects net sales of $1.675 billion, gross margin of 15%, net income of $100 million, and EPS of $0.4. The company also expects to invest approximately $750 million in capital expenditures to support its growth initiatives. We see the Q4 guidance positive and expect a beat on both the top and bottom lines, as the company generally outperforms expectations a majority of the time.

Strong Balance Sheet

The company has a healthy balance sheet, with low leverage and high liquidity, as shown by its financial statements (see below). Amkor has $1.2 billion in cash and $1.1 billion in total debt as of September 30, 2023. The company has enough cash to support its capex investments and growth initiatives.

Valuation and Price Action

Trading at 1.1x revenue, we think that Amkor is not an expensive stock and has room for upside potential. Also, its EV/EBITDA TTM ratio is sitting at 6.3x vs. the 15x industry average, indicating that the company is undervalued compared to its industry peers. In terms of its earnings potential and growth prospects, we think that Amkor has several strengths that make it an attractive investment.

If we look at Amkor's price action, the stock is showing a neutral trend, as it has been trading in a range between $20 and $30 for the past year. The stock may break out of this range if it can surpass its 52-week high resistance of $31.38.

We believe that the stock will eventually surpass its resistance and surge higher, driven by the powerful market factors that we have discussed in this article. Based on its low sales and EBITDA multiples, we think that Amkor has a significant upside potential from its current price level and recommend to buy Amkor as a long-term investment with a strong growth profile.

Risks

We see the following risks for Amkor’s valuation:

Macro Uncertainties : Amkor is a global company and is exposed to macroeconomic uncertainties, geopolitical conflicts and trade disputes that may affect its customer demand and operational efficiency.

The Semiconductor Market Contraction to Continue : Despite the optimistic projections of many analysts, the semis market may struggle to recover for a longer time period.

Advanced Packaging Competition : The packaging industry is highly competitive for the company. It has to compete not only with other OSAT providers, but also with leading foundries such as TSMC, Samsung and Intel that might affect its market share.

Conclusion

In conclusion, Amkor Technology, is on the verge of a possible breakout, ready to be triggered by several market catalysts. The demand for advanced chip packaging is increasing, the semiconductor market is projected to recover in 2024, and Amkor’s innovative portfolio position it for sustained growth. The company’s strategic investments and CHIPS Act benefits also enhance its long-term attractiveness.

We see Amkor as a solid mid-cap investment option, as it trades on lower multiples than its peers with a strong balance sheet and a positive financial outlook. It is a profitable investment opportunity for investors who have the patience to deal with short-term market volatility.

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