AMKR - Amkor Technology: Continued Sideways Action Is Likely

2023-06-06 04:26:44 ET

Summary

• The stock has done quite well in recent weeks, but there is reason to believe the rally has run its course for now.
• AMKR has begun to feel the effects of the current downturn in the semiconductor industry, but industry forecasts remain optimistic even though demand has been weaker than expected.
• AMKR has its strengths, which include a healthy balance sheet with essentially no debt and multiples that are among the lowest in the sector.
• AMKR is worth having, but it is unlikely to prove rewarding in the short term with the way the cards are laid out.

Amkor Technology ( AMKR ), a provider of outsourced semiconductor packaging/assembly and test services, or OSAT services, to the semiconductor industry, staged a strong rebound in recent weeks. This came after an extended decline that ended on May 4 with the 2023 low of $20.42. However, the rally seems to have lost steam in recent days. AMKR stock could continue what it has been doing for months, which is to stay range-bound. Why will be covered next.

AMKR is going sideways

A previous article of mine from mid-March concluded that AMKR was unlikely to make much headway in the short term. This is pretty much what the stock has done, in spite of some rather large ups and downs in the stock. The stock closed at $25.12 on June 5, not far from the $25.50 it closed at on March 21 when the article was published. In other words, the stock has not progressed all that much in the past few months, something, as mentioned before in the article, most shareholders are likely to find less than satisfactory.

Still, the stock did not stand still. The chart below shows how the stock has rallied in recent weeks after the stock hit a 2023 low of $20.42 on May 4. The stock has gained 27.4% in recent weeks, but the rally was also preceded by a selloff roughly equal in size. The two moves in opposite directions have essentially canceled each other out. Nevertheless, the rally has pulled the stock out of the hole it was in early May, resulting in a YTD gain of 4.8% for AMKR.

However, while the stock is now back to where it was before the April drop, the stock seems to have lost steam in recent days. This is reminiscent of what happened in March when the stock struggled to keep going once it got to $26 or so. In fact, the charts seem to suggest the stock is up against resistance, which could explain why the stock has struggled once it got as high as $26.37 on May 30.

The stock has not made much progress, the recent gains notwithstanding. There has been a lot of volatility, but the stock has essentially gone sideways for quite some time. It’s interesting to note how the stock is back to a price level it has visited quite a few times before. For instance, the stock got to $26.07 in February 2021, not far from the most recent high of $26.37, before the rally got snuffed out.

Why AMKR finds itself constrained

The market has reason to take a cautious approach towards AMKR, which could explain the indecisiveness in the stock with rallies followed by selloffs and vice versa. Earnings, for instance, are currently in a slump due to a downturn in the semiconductor market. In the most recent quarterly report, revenue shrank by 22.8% QoQ and 7.8% YoY to $1,472M.

Margins shrank as well, resulting in a 73.1% QoQ and 73.9% YoY decline in EPS to $0.18. While some end-markets like automotive stayed strong, other end-markets like communications continued to struggle. Still, AMKR was able to add to the cash balance with cash, cash equivalents and short-term investments rising to $1.3B, partially offset by total debt of $1.2B. The table below shows the numbers for Q1 FY2023.

Source: AMKR Form 8-K

Guidance calls for Q2 FY2023 revenue of $1,425-1,525M, which is just $3M more than Q1’s $1,472M at the midpoint and below last year’s $1,505M. The forecast expects EPS of $0.12-0.28, which is a decline of 45.1-76.5% YoY at the midpoint.

While guidance did not extend beyond Q2, there is reason to believe the second half of the year will be better, certainly in comparison to Q1. Keep in mind that Q3 tends to be the strongest quarter of the year due to seasonality, thanks primarily to the release of high-end smartphones in late summer/early fall. The struggling communications segment should benefit from this.

Q3 is therefore very likely to see sequential growth compared to Q2 and certainly Q1. On the other hand, AMKR might find it difficult to go up against a high base with Q3 FY2022’s record-setting revenue of $2,084M. H2 is likely to be better than H1, but by how much is uncertain. AMKR itself acknowledges this. While management is optimistic there will be an improvement, AMKR admits the recovery is not progressing as it had expected. From the Q1 earnings call:

“it's difficult to predict what will happen exactly in the second half. I mean, in our view the share reduction of inventory which is ongoing currently in the critical markets like BC and also the smartphone market, specifically on the Android side mid-range and low-end Android phones. So we expect that to further improve in the second quarter, although it has gone slower-than-expected.

And going into the second-half of the year, the recovery for the communication market specifically is partly, of course, attributed to the let's say the burn-off of our inventory and the industry inventory but is also very much attributed to end market demand and that's difficult to predict our macroeconomic elements with respect to consumer demand for new mobile phone models. But overall, we are optimistic that there is much more balanced inventory situation going into the second half of the year and further improvement during the second quarter.”

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

In line with this, consensus estimates predict AMKR will end up with GAAP EPS of $1.60-1.70 on revenue of $6.53-6.66B by the end of FY2023. In comparison, AMKR earned $3.11 on revenue of $7,092M in FY2022. Estimates do expect improvement the following year with GAAP EPS of $2.05-2.50 on revenue of $7.06-7.26B in FY2024, although they still fall short of the record earnings in FY2022.

AMKR is a relatively inexpensive way to play semiconductors

AMKR has its downsides with no growth at the moment and relatively low margins, certainly in comparison to those following the fabless business model, but AMKR is still one of the most affordable ways to play a potential boom in the semiconductor market. The table below compares the multiples for AMKR versus what the sector tends to go for.

Source: Seeking Alpha

Keep in mind the semiconductor market remains in a slump, despite some market segments doing quite well like AI. For instance, a recent industry forecast from Gartner expects worldwide semiconductor revenue to shrink by 11.2% YoY to $532.2B, which is more than the high single digits expected previously. These downward revisions are due to weaker-than-expected demand in the semiconductor market. On the other hand, a strong rebound is predicted the following year with revenue increasing by 18.5% YoY to $630.9B in 2024.

Investor takeaways

AMKR is worth having in the event there is a strong rebound in semiconductor demand in the next 6-12 months as many are predicting. AMKR is one of the more inexpensive ways to play a boom in semiconductors, whether it is due to AI or some other factor. Increased chip demand bodes well for OSAT demand and AMKR is one of the leaders in that department. AMKR is well placed in certain market segments that are likely to outperform in the coming years, including automotive.

We are now in June, which means seasonality will soon turn from being a headwind in H1 to a tailwind in H2. The communications segment, which has really struggled and contributed greatly to the recent decline in the top and the bottom line, should really benefit from new high-end smartphone models hitting the market starting in late summer. While the Q1 results and Q2 guidance were very much on the weak side, Q3 and Q4 should show significant improvement, if only due to seasonality.

With that said, I would not be putting new capital to work at this time by being a buyer of AMKR. While optimistic forecasts regarding the semiconductor industry are abundant, certainly as it relates to 2024, the fact remains that the industry is not doing well right now. In fact, the market for semiconductors has been significantly weaker than anticipated, resulting in various downgrades to the outlook for 2023.

AMKR itself acknowledges the uncertainty and the fact that demand has been weaker than expected, despite all the forward projections that could actually be too optimistic. While getting in on AMKR at this time could pay off next year if the market rebounds the way some expect it to, opening a new position in AMKR is a gamble since there are no guarantees all the bullish industry forecasts are in any way accurate. On the contrary, they have been shown to be off lately.

Charts are not infallible, but they argue against expecting too much in the way of returns for the stock. Resistance seems to be in the way of the stock. The stock has essentially gone sideways by staying within a range for some time and it does not look like that is about to change anytime soon. True, the stock did rally in recent weeks, but only after a selloff that was just as large.

Long AMKR has not been a rewarding play for some time and odds are it will remain that way as long as there is no clear evidence the current downturn in the semiconductor market has ended. There may be rallies in the short term, but odds are selloffs are not far behind to send the stock back to square one. Most shareholders are not likely to find this satisfying.

Bottom line, a previous article ended by cautioning not to be surprised if the stock does not have much to show for in the short run and that is basically what has happened since. AMKR has its strengths that should help it in the long run. Just do not expect to see much of an immediate payoff if that is the objective.

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