AMKR - Amkor Technology Might Be Stuck In A Range For A While

2023-03-21 09:20:36 ET

Summary

• AMKR stock has looked weak recently, underperforming at a time when many semis are rallying, which caused it to lose support and end the uptrend.
• A financial crisis and weak guidance were among the headwinds, which suggest AMKR may be heading for some lean times after years of expansion.
• AMKR has its strengths, which include a healthy balance sheet and the stock being available at multiples that are lower than most.
• Long AMKR is worth pursuing, but now may not be a good time to put new money to work with the way the cards are laid out.

Amkor Technology ( AMKR ), a provider of outsourced semiconductor packaging/assembly and test or OSAT services to the semiconductor industry, has been trending higher. That is until a few days ago. The rally appears to have hit a roadblock, weighed down by a couple of headwinds. It seems the time has come to lower near-term expectations. Why will be covered next.

AMKR falls below support

Up until fairly recently, it was relatively easy to guess which direction the stock was likely to be heading for. The stock was in an uptrend with higher lows and higher highs. It therefore stood to reason that betting on AMKR made sense with longs likely to see higher prices if they stuck with AMKR. And up to early February, that’s pretty much what happened.

As recently as February 9, the stock hit an intraday high of $30.82, resulting in a YTD gain of 28.5%. It also meant that AMKR had more than doubled in value since the stock hit bottom at $14.89 on July 5. However, the stock has wavered in recent weeks, weighed down by a couple of headwinds. These include an earnings report that came in mixed and fears of a financial crises spinning out of control.

Still, the stock is up 3% YTD. On the other hand, AMKR has not done as well as most semiconductor stocks. The iShares Semiconductor ETF ( SOXX ), for instance, has gained 22.3% YTD, well ahead of the 2% YTD gain for the SPDR S&P 500 ETF ( SPY ). Semis have done well recently, but AMKR not so much. The chart below shows how the stock has fallen off in recent weeks.

Note how the stock spent several weeks hovering above the lower trendline. This trendline served as a line of support for the stock going back to last year, but the stock managed to break below support on March 10, dragged down by a stock market selloff induced by the collapse of several U.S. banks, which triggered fears of a financial crisis.

However, while the stock has breached one line of support, another line of support in the $23.50-24.50 region seems to have held, at least up to this point. Note how the stock bounced off of the aforementioned region in recent days. Recall also how the stock was unable to breach this same $23.50-24.50 region last December, which halted the stock’s decline and paved the way for the stock to rally into 2023. Still, the uptrend seems to have been broken, which weakens the argument for long AMKR.

Growth at AMKR has entered a lull

Fears of a contagion in financial markets was not the only factor that had an impact on AMKR. AMKR missed earnings expectation in its latest report and guidance was on the weak side. Q4 revenue did surpass expectations with an increase of 10.5% YoY to $1,906M, but EPS came in lower than expected with a decrease of 23.9% YoY to $0.67.

However, it’s worth noting that foreign currency losses negatively affected the bottom line by $10M. A higher-than-expected tax rate in Q4 also reduced earnings. So too did the decline in gross margin, which can be attributed to a change in product mix. The table below shows the numbers for Q4 FY2022.

Source: AMKR Form 8-K

Nevertheless, FY2022 was a year for the record books. FY2022 revenue increased by 15.5% YoY to $7,092M and EPS increased by 18.7% YoY to $3.11, both record highs. Advanced packaging accounted for 76% of revenue. AMKR finished FY2022 essentially debt-free with total debt of $1.2B offset by $1.2B in cash and short-term investments on the balance sheet.

Source: AMKR Form 10-K

However, Q1 guidance was weaker than expected. Guidance calls for Q1 FY2023 revenue of $1.4-1.5B, a decline of 9.2% YoY at the midpoint. The forecast expects EPS of $0.06-0.22, a decline of 79.71% YoY at the midpoint. Gross margin is expected to drop, primarily due to lower utilization rates as a result of weakening demand.

On the other hand, AMKR suggested the downturn could be relatively brief. The outlook calls for AMKR to outperform the semiconductor market in 2023. Most market forecasts expect the semiconductor market to shrink in the mid to high single digits YoY in 2023. Gartner, for example, sees the market declining by 6.5% YoY in 2023. This suggests AMKR will quickly rebound from the drop in Q1 and quarterly revenue will pick up towards the end of the year if AMKR is to beat the overall market. From the Q4 earnings call:

“As we enter 2023, we expect overall macroeconomic conditions to be challenged. We anticipate our business to improve in the second half, driven by advanced packaging demand in support of premium tier smartphone launches and continued strength in the automotive and industrial market. Building on our leadership position in advanced packaging, our broad global footprint and the market share gains we made in 2022, we expect to outgrow the semiconductor market in 2023.”

A transcript of the Q4 FY2022 earnings call can be found here .

AMKR is inexpensive

Earnings estimates predict AMKR will earn $1.85-2.62 on revenue of $6.14-6.76B in FY2023, which represent YoY declines of 15.8-40.5% and 5.7-13.4% respectively. These numbers are expected to increase to $2.40-3.09 and $7.06-7.36B, respectively, in FY2024. In other words, AMKR is not expected to revisit the peak reached in Q3 FY2022 when AMKR earned $1.24 on revenue of $2,084M for at least the next two years.

While growth is expected to take a leave of absence in FY2023, the flip side is that AMKR trades at relatively low valuations. Multiples for AMKR are in most instances well below those of other stocks, including those in the semiconductor space. For instance, AMKR has an enterprise value of $6.35B, which is equal to 4.88 times EBITDA on a forward basis and 4.2 times EBITDA on a trailing basis. In comparison, the sector medians are 12.99x and 13.06x respectively.

Do note that earnings are expected to decline in 2023 as shown by forward multiples being higher than their trailing counterparts, mostly as a result of a weak H1, although earnings are expected to return to growth next year. Nevertheless, AMKR presents a relatively affordable option for those who are interested in the future potential of the semiconductor sector, but who may balk at the relatively high valuations that many semis trade at.

Source: SeekingAlpha

Investor takeaways

I remain bullish on AMKR, but unlike an earlier article , I would not be a buyer of AMKR right now. True, the stock has faced a couple of headwinds in recent weeks, but the fact that it has lagged so far behind at a time when semis are getting a lift from a rotation towards tech is a cause for concern. Not only have many semis been able to withstand the recent selloff in many stocks, but they have managed to trade higher in spite of the turmoil caused by the banking sector.

AMKR, on the other hand, has not. The stock looks weak and that is something worth noting. The stock could not get going at a time when it probably should have. Instead, the stock fell below a level of support that had kept the stock going higher for months. The uptrend in the stock is no more if the charts have anything to say. What comes next has yet to reveal itself.

AMKR also let the market down with a rather weak Q1 guidance, mostly as a result of the current slump in the semiconductor market. Keep in mind that AMKR is not alone as many semis are facing the same slump in demand, which is mostly the result of a weak market for PCs and smartphones, although some market segments like automotive are more resilient.

Multiples are higher than they have been as recently as last October thanks to a strong rally, but they are still more than fair. EV/EVBITDA, for instance, are in the mid single digits. You won’t find that in most stocks. On the other hand, AMKR is entering a slowdown after years of expansion that saw the top and the bottom line reach new record highs in FY2022. Both are now expected to decline in FY2023.

The semiconductor market is expected to gradually rebound in H2, something that AMKR itself seems to agree with. A bellwether like TSMC ( TSM ), for instance, has predicted a rebound starting in H2 2023. On the other hand, there is some uncertainty associated with this outlook. Combine the current weakness in semiconductor demand with the turmoil in the financial sector, which are likely to be with us for a while, odds are AMKR will continue to be weighed down as long as these headwinds persist. Longs may have to endure some lean times after several plentiful years. Now does not look like a good time to be making too many bets.

Bottom line, AMKR seems to be stuck in a tug-of-war, which will likely limit stock gains in the near term. On the one hand, AMKR is facing a number of headwinds. Whether it is a deceleration in demand due to an industry downturn or a global financial crisis weighing on stocks, there is reason to be more cautious when deciding whether to put new money to work. The charts are leaning towards the stock going sideways for a while.

On the other hand, AMKR has a number of strengths it can count on. The balance sheet is in good shape with essentially no debt to worry about. Industry interest in advanced packaging remains as strong as ever and that bodes well for AMKR in the long run, short-term headwinds notwithstanding. Multiples are lower than most.

With AMKR caught between two forces pulling in opposite directions, the stock could find itself stuck in a range. The charts suggest resistance is in the $30.50-31.50 region and support lies in the $23.50-24.50 region. In the end, AMKR is worth having, just do not be surprised if there is not much to show for in the near future.

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