SMH - ASE Technology: Shares Remain Underpriced Despite An Expected YoY Earnings Drop

Summary

• Growth stocks surged to start 2023, outperforming value.
• Chip stocks are dealing with fears of a supply glut, but the space is rallying, climbing the wall of worry.
• I see upside potential with ASE Technology given a low valuation and eventual return to growth while its chart is in an uptrend.
• Strong free cash flow should support ASX's high yield.

Growth stocks outpaced value to kick off 2023. BofA reported that it was a 3% relative win for long-duration names compared with the cheap side of the market. Semiconductor equities performed particularly well despite fears of a chip glut. What's more, non-US stocks continue to pace well compared to domestic equities. One semiconductor packaging name has been on the rise, but is it too late to join the party? Let's take a look at ASE Technology.

Growth > Value In January

According to Bank of America Global Research, ASE Technology Holding ( ASX ) is the no.1 outsourced assembly and testing (OSAT) firm globally, in terms of market share by revenue. ASE acquired Siliconware Precision ( SPIL ) in 2018 and acquired USI in 2010, which became its EMS business segment providing synergies in system-level packaging. 2 shares = 1 ADR.

The Taiwan-based $14.3 billion market cap Semiconductors & Semiconductor Equipment industry company within the Information Technology sector trades at a low 6.2 trailing 12-month GAAP price-to-earnings ratio and pays a high 7.5% dividend yield, according to The Wall Street Journal . The company reported a y/y revenue drop for December in its monthly interim report issued on January 10, but revenues for the year were higher by 10.7% - more y/y losses could be in store, though.

On valuation , analysts at BofA see earnings continuing to decline this year after a forecasted fall of 7.5% in 2022. Per-share profits should be back on the rise come 2024, though. Dividends are often volatile and move commensurate with earnings with non-US firms, and that is the case here, but the yield should remain above 6%, per BofA. What's encouraging to me is that ASX's free cash flow yield is very strong in 2023 even with the earnings drop - the FCF multiple is under 10. Both the company's operating and GAAP P/Es are exceptionally low while its EV/EBITDA ratio is also attractive compared to the market average.

ASE Tech: Earnings, Valuation, Dividend Forecasts

Looking ahead, corporate event data provided by Wall Street Horizon show a confirmed Q4 2022 earnings date of Thursday, February 9, with a conference call immediately after results hit the tape in the overnight NY time Wednesday into Thursday. You can listen live here . The following session, ASE reports January interim sales data, so expect volatility to spike as we get closer to that timeframe.

Corporate Event Risk Calendar

The Options Angle

Digging into the upcoming earnings report, data from Option Research & Technology Services (ORATS) show a consensus EPS forecast of $0.21 which would be a 58% decrease from $0.50 of per-share profits earned in the same quarter a year ago. What's bullish though is that the company has topped analysts' earnings forecasts in each of the last nine quarters while the stock price has traded higher post-reporting in the last five quarters.

Options traders, meanwhile, have priced in a small 3.6% earnings-related stock price move calculated by comparing the cost of the at-the-money straddle expiring soonest after the earnings date divided by the share price. That is a small figure compared to history, even with the past two reactions being muted. I am inclined to be long premium at that price.

Inexpensive Options Ahead of Earnings Next Week

The Technical Take

With a still favorable valuation and bullish clues in the options world, how's the chart look? I see more optimism here. Back in Q3 , I was sanguine on the stock, and shares are indeed higher. But it was not a perfect call as the stock blew right past resistance I noted around $6.50 and dipped below my support level. A near-term peak was put in at $6.88, and a pullback met buyers right at the 200-day moving average. That proved to be a bull flag, and ASX's stock is now near 1-year highs in the mid-$7s. I see upside resistance in the low $8s while the mid-2021 high of $9.62 could be a further area of potential profit-taking.

What's bullish here is that the start of February featured a big volume spike as the stock lifted 5%. Moreover, the momentum RSI zone is in the bullish 40 to 80 range as an uptrend line from the October low of $4.45 holds. A long position here with a stop under $6 makes sense - there is a gap that could get filled near $6.70 - a good spot to buy the stock too.

ASX: Bearish to Bullish Reversal, Resistance Levels Noted

The Bottom Line

With a rebound in growth stocks this year, semis are at the heart of the buying spree. I don't think it's too late to climb aboard the ASX train. A low valuation with growth returning in the coming quarters is a boon while technical trends are favorable.

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