CAMT - Camtek: I Remain Conservative For Now

2023-03-14 06:34:45 ET

Summary

• CAMT claims to have a 60% market share in wafer level packaging inspection, which is a market worth $347 million.
• Management expressed optimism for improvement in the second half of the year.
• WFE market faces macro headwinds with the semi market projected to decline by 3.6% in 2023.
• I remain conservative for now and maintain a Hold rating on CAMT stock.

Thesis

Camtek Ltd. ( CAMT ) has a strong position in the wafer level packaging inspection market, with a market share of about 60% and only one significant competitor. The demand for advanced packaging is increasing due to the growing complexity of semiconductor chips in various industries, which has driven growth for CAMT. However, the company’s growth story faces challenges due to broader WFE headwinds. Although the management remains confident on a rebound in late 2023, I remain conservative for now and keep a Hold rating on the stock.

Post Q4 Outlook: Optimistic on Recovery in Later Part of 2023

The company's revenue for the quarter remained flat at $82 million, in line with market expectations. Strong growth in Advanced Packaging, which accounted for 67% of revenue, saw a 14% increase compared to the previous quarter, offsetting the decline in Compound Semi, which accounted for 10% of revenue and experienced a 41% decline QoQ. Front End revenue remained unchanged at 10%, while CIS/Other revenue decreased by 7%, accounting for 13% of total revenue. Operating expenses (Opex) were slightly lower than expected at $17 million, and there was a significant increase in interest income, resulting in a slightly better-than-expected PF EPS of $0.50, compared to the market's estimate of $0.48.

Camtek, like many other semiconductor capital equipment companies, provided guidance indicating a double-digit decrease in revenue for March, but expressed optimism for improvement in the second half of the year. The company's sales in China, which accounts for 80% of its revenue, were strong during the quarter and may benefit from a faster recovery in China. Additionally, Camtek has secured wins in the SiC market across various regions and received an $18 million order from a Tier 1 manufacturer for multiple machines. Despite these positive developments, I believe that the equipment industry is in a prolonged correction period and remain cautious about the return to growth in broader segments like Advanced Packaging.

Correction in WFE and Semi Keeps Me Conservative

The semiconductor market is going through a significant correction cycle as demand for PCs, smartphones, tablets, and consumer electronics has decreased significantly. The prices of high-end memory have decreased by 50% in the last year, and the supply chain for phone, personal computer, and data center chips has returned to normal lead times. To reflect this, estimates for the semiconductor market have been lowered, with Gartner projecting a revenue decline of 3.6% in 2023. While this may be a challenging period for the industry, I believe that estimates need to reset before the market can recover.

The market has been holding the view that Foundry capex would hold up, but this is unlikely due to Tier 2 foundries already experiencing order cuts and Tier 1 cuts around the corner. Many companies have been reporting customer softness. Other Tier 2 foundries, such as Global Wafers and PSMC have also reported softness, customer delays, and price cuts. TSMC is a bit more complex due to stable AAPL production, but their other large leading-edge customers, such as NVDA and MTK are experiencing weakness.

Strong Presence in Fast Growing End Markets with Addressable TAM

Advanced packaging refers to a technique used in semiconductor manufacturing that involves 2.5D/3D, system-in-package, and fan-out technologies. This method enables more efficient communication between the chip and package, leading to reduced energy consumption and increased speed. Advanced packaging is in high demand due to the growing volume of electronic devices and the need for increased reliability, particularly in the automotive and smartphone industries. CAMT claims to have a 60% market share in wafer level packaging inspection, which is a market worth $347 million. 56% of CAMT's installed base (from 2016 to 2020) is in advanced packaging systems, which is growing at a CAGR of approximately 8%. CAMT also has exposure to faster-growing segments, such as fan-out and heterogeneous packaging, which are growing at a CAGR of 15-20%.

Valuation

CAMT is currently trading significantly below its own historical multiple and sector median of 23.7x. My bullish scenario values CAMT's stock at $34 by the end of year based on a 20x CY23 estimate of earnings per share. Despite trading at a lower price-to-earnings ((PE)) ratio than its peers, CAMT enjoys a superior net income margin of 25%, compared to the industry average of 19%.

Final Thoughts

I keep a rating on CAMT because while the company has a strong position in the wafer level packaging inspection market with limited competition and is exposed to growth drivers in Advanced Packaging, CMOS Image Sensing, and RF, it may face challenges in 2023 due to broader WFE headwinds. CAMT has shown solid revenue growth and improved operating margins over the past five years, and I remain confident in the company’s strong execution. I believe the company could perform better if it sees greater top-line acceleration next year, but I remain cautious due to the potential headwinds in the WFE market. My bull case scenario values CAMT's stock at $34 by the end of the year based on 20x CY23 estimate of earnings per share.

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