KLIC - Kulicke and Soffa Industries: May Be Due For A Rebound In The Near Term

2023-10-13 05:58:58 ET

Summary

• Kulicke and Soffa Industries has sold off in the last two months, but there is reason to believe the stock is due for a rebound in the near term.
• The stock may have found support, but there are indications of stiff resistance looming on the horizon, which will keep a lid on the stock.
• The market is looking for a better FY2024 as previously suggested by KLIC, but any deviation in the upcoming report could serve as a catalyst.
• The Company is worth considering as a temporary play, but for something like a longer term, more needs to happen than what KLIC has shown thus far.

Kulicke and Soffa Industries ( KLIC ), a supplier of equipment and other solutions for the semiconductor and LED markets, has lost about 20% of its value since early August. This after spending a couple of months unsuccessfully trying to overcome what is likely to be resistance. However, the recent drop may have created the conditions for a rebound in the stock, if only temporarily. Why will be covered next.

KLIC has stayed range-bound

A previous article from early May rated KLIC a hold when the stock was priced at $46.80 for a number of reasons, including an uncertain outlook, specifically as to when the current industry downturn would turn into the next upturn. Almost half a year later and the stock closed at $47.44 on October 11, meaning neither the bulls nor the shorts have much to show for as the stock has essentially stayed on hold.

Still, while the stock is basically back to square one, there were some rather big moves in both directions during these past months and for the whole of 2023 for that matter. The chart above shows how the stock has rallied at times, only to be followed by a selloff. For instance, the most recent selloff in August/September was preceded by a rally in May/June, resulting in them canceling each other out. The stock is up 7.2% YTD.

Why KLIC may have stalled where it did

Note how the most recent rally in the stock came to a halt when the stock got to the $58-62 region, which also happens to be the same region where the second-to-last rally came to an end back in early February. The stock spent much of June/July trying to get past the $58-62 region, but it failed to do so despite repeated attempts.

The stock got to $60.20 on June 30, but that was as high as it got. It seems there is something out there that is making it hard for the stock to get past the $58-62 region. It's therefore worth mentioning that the stock bottomed at $35.95 in October 2022 after a year-long downtrend that started with the September 2021 high of $75.29.

A 61.8% Fibonacci retracement of this downtrend would put the stock at $60.26, which is just $0.06 above the most recent high and 52-week high of $60.20 mentioned earlier. In other words, the reason why the stock was unable to go any higher than $60.20 despite trying for months is likely due to resistance standing in the way.

Why KLIC could be due for a rebound if only a temporary one

In addition, it's also worth mentioning that the 23.6% Fibonacci retracement of the aforementioned downtrend is $45.23. This is just $0.20 removed from $45.03, which happens to be where KLIC bottomed on May 4, 2023, before it went on its most recent rally. The stock has gotten close again to $45.23 in recent weeks, which could explain why the stock seems to have stabilized in recent weeks after the drop of the last two months. Support seems to be propping the stock, just as it seems to have done in May.

Furthermore, there may be another factor as to why the stock is having issues going higher in the $58-62 region. This $58-62 region is where fair value may be found for KLIC. True, fair value is highly subjective and open to different interpretations, in addition to there being multiple ways of calculating fair value.

Nonetheless, GAAP EPS grew from $1.55 in FY2017 to $7.09 in FY2022, which represents a CAGR of 35.54%. If we then assume EPS grows by 35.54% on average per year in the next five years and with TTM EPS of $1.69, then an argument can be made that fair value for KLIC is $60.06. This is just $0.14 below the most recent high of $60.20. It's also in the aforementioned $58-62 region.

In other words, another reason why the stock peaked where it did in June is because any higher and the stock would find itself significantly above fair value of $60.06. Combine this with the resistance mentioned earlier and it becomes easier to see why the stock has been unable to get past the $58-62 region all year. If KLIC is to succeed where it has failed all year, a catalyst is likely to be needed.

A lot of shorts remain interested in KLIC

The stock has room to appreciate as it is way below the previously mentioned resistance levels, especially if we assume support is close by in the $44-48 region. While the stock is technically not yet oversold, although it is close to it, the stock has fallen a lot in recent months. This argues for a move higher to offset the move lower in recent months.

However, it's worth mentioning that there are a fair amount of people who are convinced the stock is heading lower and are shorting KLIC for that reason. According to data from the Nasdaq , short interest stood at 6,417K shares as of September 29. This translates to a short float of 11.7%. It's also close to short interest of 6,574K shares on July 31 and before the 20% or so drop in the stock in August/September, which suggests most shorts believe the stock can go lower as they have not closed their positions despite the stock dropping by as much as it did.

This may be partly due to multiples being where they are. While multiples are not in lofty territory as they are roughly in line with those in the sector, they are also not exactly in bargain territory. For instance, EV/EBITDA is 17.7x on a forward basis and 15x on a trailing basis, which is somewhat higher than the 14x and 14.4x, respectively, for the sector median. The table below shows some of the more commonly used multiples for KLIC.

Source: Seeking Alpha

A potential catalyst is around the corner

KLIC has essentially stayed range-bound for much, if not all of 2023. However, KLIC is scheduled to report Q4 next month, which could be the catalyst needed to shake things up. Keep in mind that while quarterly results have dropped, especially in the last three reports, they have improved somewhat.

The current consensus is that KLIC will report GAAP EPS of $0.26 and non-GAAP EPS of $0.43 on revenue of $200M for Q4 FY2023. This is not that different from what guidance from KLIC suggested as shown in the table below.

Source: KLIC

The table below shows recent quarterly results for comparison. While the numbers have dropped a lot YoY, they have improved QoQ. Note also that the operating loss in Q3 FY2023 was due to an impairment charge of $21.5M.

Source: KLIC

Guidance did not extend beyond Q4, but the most recent outlook expects KLIC to have a better year in FY2024 than FY2023. Still, the outlook is subject to revisions, especially with lots of things in flux that could alter the outlook. From the Q3 earnings call:

As far as near term visibility, as Fusen mentioned, right, it is pretty dynamic at this point. We believe there will probably be some more seasonality this year then during '21 - '22 during the ramp. Also, I think for FY24, as Fusen indicates, we believe it will be a much better year than '23, however when--I think the first half may not be as strong as the second half, but again there's a lot of moving pieces right now, but we feel pretty good about '24 as compared to '23."

A transcript of the Q3 FY2023 earnings call can be found here .

The market will be curious to know if the recent improvement in quarterly results continues or whether KLIC can provide more clarity on the current market situation. With the last earnings call in mind, the market will be looking for what KLIC has to say about FY2024 or whether it maintains its prior optimism. If KLIC sticks to its earlier comments about FY2024 being much better than FY2023, that could help the stock. But the reverse is also true. Any lowering of the outlook could send the stock lower.

Investor takeaways

An argument can be made that long KLIC is worth considering at this point as a speculative play, if only temporarily. The stock has essentially traded within a range for much of 2023 and the stock is currently near the lower bound of this range. The stock is due for a move higher after spending much of the last two months going lower. The stock is close to support with lots of room ahead before resistance. This argues in favor of going long.

However, the upcoming report next month could spring a surprise. The current consensus is that FY2024 will be better, as suggested by KLIC itself, but it is possible the outlook will be revised due to all the uncertainty as acknowledged by KLIC. This may be partly why shorts have stuck to their positions, even after the stock has dropped by as much as it has in recent months.

Some may want to bet on KLIC making its way higher in the near term, but I remain neutral on KLIC. The stock has basically gone sideways and if this pattern is to be broken, a catalyst may be needed. This could come in the form of clear signs the downturn is completely over and the next upturn is about to start. At this time, there is not enough evidence that KLIC is on the verge of an upturn.

KLIC can be a rather volatile stock. Quarterly results can change quickly. They have collapsed in recent quarters after soaring higher as the upturn morphed into a downturn. The stock itself is prone to big rallies, but also big selloffs in a short time span. This makes KLIC a rather risky stock as it is easy to come under water, whether long or short. The risk of taking a haircut is rather high as things stand with KLIC.

Bottom line, staying neutral has proven to be the right call for KLIC and not enough has changed to warrant a different stance. The stock may make it back to the recent highs, but it will encounter stiff resistance once it gets there for reasons discussed earlier. If the sideways action in the stock all year is to change, more needs to happen, especially in terms of clarity regarding the outlook for KLIC. That has yet to happen.

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