ASMIY - ASM International: Upcoming Q3 Earnings Report Unlikely To Disappoint

2023-10-22 00:15:17 ET

Summary

• ASM has sold off after hitting an all-time high, and a look at past chart patterns suggests this was not a coincidence.
• The stock is due for a bounce, but there is reason to believe the stock could continue to give back more of the gains from the past 12 months.
• The recent Investor Day calls for double-digit growth in FY2022-2027, which is likely why the upcoming Q3 report is unlikely to disappoint.
• There is an argument to be made for long ASM, especially for the long haul, but there is also a case to be made against it.

ASM International ( OTCQX:ASMIY ) is scheduled to report its Q3 results on October 24, which comes at an auspicious time as the stock is currently in the midst of a major decline that has lasted the better part of the last two months. This after the stock reached an all-time high as recently as late August, building on the rally that started last year. Why will be covered next.

ASM has sold off

Up until fairly recently, ASM could do no wrong. The stock kept climbing, building on the rally that started last year. However, the stock has sold off in the last two months or so after it hit an all-time high of $501.70 on August 23. The chart below shows how the stock has fallen after a long rally that saw the stock appreciate by roughly 150% from the low to the high.

The stock closed at $386.57 on October 19, which means ASM has lost 23% of its value since the August 2023 high of $501.70. It’s also worth noting that while the stock hit an intraday high of $501.70 in August 2023, the stock actually closed at $499.82. Note that this is very close to the November 2021 high of $497.06, or $496.09 if intraday highs are excluded. The stock thus peaked at roughly the same price level two years apart.

The November 2021 high was followed by a long decline that saw the stock lose around 60% of its value by July 2022. The move higher from July 2022 to August 2023 could be seen as a retracement of the move lower from November 2021 to July 2022. This could help explain as to why the stock reversed course in August 2023 because people may have decided it was time to sell after matching the previous high of two years earlier.

It’s possible the decline in the stock of the last two months is only the beginning, although it is worth mentioning that the stock may be close to a potential level of support. If we assume the recent fall in the stock is the retracement of the uptrend, starting with the July 2022 low of $201.38 and ending with the August 2023 high of $501.70, then the 38.2% Fibonacci retracement is at $386.98.

This may help the stock bounce in the coming days, especially since the stock is likely due for one after dropping by as much as it has in the last two months. If support does not hold and the stock goes lower, then the next potential support levels are the 50% Fibonacci retracement at $351.54 and the 61.8% Fibonacci retracement at $316.10.

Why ASM may be overvalued by some measures

However, it is not impossible for the stock to head lower for several reasons. For instance, the stock may be way above fair value. Granted, fair value is very subjective and open to dispute. Still, at the 2023 Investor Day held on September 26, ASM aimed for revenue to grow at a CAGR of 11-16% to €4-5B in FY2022-2027, a gross margin of 46-50% and an operating margin of 26-31%.

Going by Peter Lynch, an argument can be made fair value for ASM is around €248 with earnings expected to grow by an estimated 20% per year on average in the next five years and with TTM EPS of €12.39. If using the discounted cash flow method to calculate fair value, then fair value is slightly lower at an estimated €247. Either way, fair value of €247-248 or about $262 using a EUR:USD exchange rate of 1:1.06 is well below the current stock price of $386.57.

In addition, multiples are higher than most in the sector. For instance, ASM has a market cap of $19.09B, which means ASM is valued at 6.4 times TTM sales of $2,961M. In terms of P/E, ASM is available at a trailing P/E ratio of about 29 with TTM EPS of €12.39 or $13.11 and a stock price of $386.57. The median in the sector is 2.5x and 24.8x respectively.

The Q3 report is due

There are opposing forces that are pulling the stock in opposite directions. The release of the Q3 report on the 24 ^th could therefore play an important role as it comes at a crucial junction. Keep in mind that the upcoming report comes against the backdrop of a downturn at ASM. The numbers have gone down and this is expected to continue in Q3. From the Q2 earnings call:

“In terms of demand, the trend weakened during the quarter and order intake in the second quarter reflected the impact of softer market conditions and push-outs as we already flat with our first quarter results. Continued inventory corrections and weaker than expected end demand led some customers to reconsider their spending plans for this year. In addition, part of the push-outs is also explained by some delays in new fab readiness.”

A transcript of the Q2 FY2023 earnings call can be found here .

The table below shows how the top and the bottom line have come under pressure. Book-to-bill, for instance, was below one in the first two quarters of FY2023, a reflection of weakening demand. On the other hand, revenue is up YoY, which puts ASM in a privileged position because most suppliers of semiconductor equipment are worse off than ASM since they have seen their revenue shrink and not grow like ASM.

While there are differences in product overlap, ASM competes against a number of other companies, including the likes of Lam Research ( LRCX ), Veeco ( VECO ), Tokyo Electron, and many others. LRCX, for instance, has seen its YTD revenue shrink by 23.3% YoY from $13,770M to $10,559M. The market as a whole is expected to shrink. For instance, a recent forecast from SEMI predicts the market for wafer fab equipment will shrink by 18.8% YoY to $76.4B in 2023. In contrast, ASM is predicted to grow 2023 revenue in the single digits according to its most recent outlook.

Source: ASMIY

Could the outlook change?

The most recent outlook sees FY2023 revenue growing in the single digits. At the same time, ASM sees a decline of 10+% in H2 compared to H1. With H1 sales of €1,379M and Q3 guidance of €580-620M, Q4 revenue is projected to be around €641M. In other words, a sequential recovery is expected soon.

“Now turning to the outlook for the rest of the year. We expect sales of between €580 million to €620 million in the third quarter at constant currencies. With the first quarter results, we announced that push-outs and weaker demand in logic/foundry would result in lower orders in both the second quarter and the third quarter compared to the level in the first quarter. This is also what we still expect for the third quarter although we now project the drop in the third quarter orders to be less pronounced than in the second quarter.

For the second half, our view is unchanged. We still expect revenue to be down 10% or more compared to the first half. This reflects the balance of continued weakness in memory, softening in logic/foundry and a continued solid trend in power/analog.

For 2023 as a whole, we still expect our revenue to increase by a single-digit percentage, including LPE and at constant currencies. This compares to the WFE wafer fab equipment market, which is now expected to drop by a mid- to high-teens percentage in 2023. The WFE forecast is slightly more positive than three months ago and for the largest part, explained by stronger mature node spending in China. We still expect to outperform WFE this year.”

ASM is currently in a soft patch, but it is expected to recover. ASM has outperformed the industry, which is expected to contract in the mid-to-high teens. This is thanks in part to contributions from China. Another tailwind could be the move towards GAAFET from FinFET, which is expected to increase demand for ALD, which bodes well for ASM as a leader in ALD.

Still, the outlook may not be such a sure thing. For instance, orders from China have offset the drop elsewhere, but it remains to be seen if or when this will end. It is known that companies in China are aware their ability to get their hands on chipmaking equipment may be restricted in the future, more than it already has, which is why many have rushed to buy as much as they can, while they still can.

ASM is upbeat about future demand in China, part of why it expects to grow at a CAGR of 11-16% in FY2022-2027 as stated in the recent Investor Day. Nevertheless, it’s possible changes in China may lead to revisions to the outlook, especially if orders from China dry up, whether on their own accord or due to trade restrictions.

Investor takeaways

ASM’s ability to grow at a time when the industry does not deserve mention. True, growth has cooled off, but there is growth, nonetheless. In addition, the recent Investor Day suggests ASM is set for continued growth in FY2022-2027. It's also worth mentioning that the industry downturn is not expected to last. If ASM is able to grow when the industry is down, then that bodes well for when the next upturn in the industry does arrive.

The Investor Day was held in late September and the fact that ASM raised its outlook for growth in the FY2022-2027 period suggests the Q3 report is unlikely to disappoint since much of Q3 was over by the time the Investor Day was held. In fact, the Investor Day suggests ASM is likely to beat expectations on the 24th when ASM is set to report.

If ASM can soundly beat expectations and/or issue an upbeat outlook, in combination with a stock that is due for a bounce after the months-long decline and the stock close to a potential support level, then all this may be enough to reverse the recent selloff in the stock. The upcoming report could be a catalyst in that sense.

However, while ASM may have good prospects, an argument can be made that the stock is way overvalued. Depending on which method is used to calculate fair value, fair value may be as much as a third below the current stock price. This is despite the fact that the stock price has lost 23% of its value since peaking in late August.

China may also be a wildcard. Orders from China appear to have boosted results. This has helped ASM, especially at a time when there is a lot of slack in demand, but it remains to be seen whether this tailwind will last or whether it will lose some or all its potency. It’s very likely at least some of the recent order patterns in China were influenced by the possibility of trade restrictions, which suggests the headline growth numbers from ASM are not an accurate reflection of the state of real demand.

I am neutral on ASM. The stock price is currently close to a price level where support may reside. The stock has also dropped by more than 20% in the last two months. The Q3 report on the 24 ^th is unlikely to disappoint. These conditions suggest a bounce, if only a temporary one, is likely soon. As a short-term trade, ASM may be worth looking into, but those who have a longer-term horizon may be taken aback by rather high valuations accorded to ASM and the possibility the quarterly results are not totally indicative of real demand. If that includes you, then it may be wise to take a pass on ASM, for now at least.

For further details see: