PLAB - Photronics: Still A Buy On Strong Demand And Profitability Outlook

2024-04-02 06:00:47 ET

Summary

• Photronics, a leader in the photomask industry, has benefited from surging demand notably in Asia, where it made 80% of 2023 revenues.
• After spiking almost 50% in December on strong Q4 results, the stock recently pulled back following the Company's Q1 revenue and operating margin miss.
• Short- and longer-term growth and profitability trends seem intact, as Photronics is well-positioned to capitalize on secular tailwinds.
• With a fair value of $36 (range $31 to $40), PLAB is a buy. Given possible near-term price pressures, selling $25 puts expiring in May could be a less risky way to go long.

Photronics ( PLAB ) is a leading global producer of photomasks, which are high-precision quartz or glass plates housing microscopic images of electronic circuits. These photomasks play a pivotal role both in semiconductor and flat panel display production, serving to imprint circuit designs onto semiconductor wafers and flat panel substrates. Their utility extends to the fabrication of integrated circuits [ICs], various flat panel displays [FPDs], and, to a lesser degree, other electrical and optical components.

Thesis

Photronics, Inc. is a top-3 producer in the global photomask industry and the largest "pure player" in the space. The sector is expected to benefit both from fast technological developments in the semiconductors industry, fueled amongst others by artificial intelligence [AI] and virtual reality [VR], as well as from continuous innovation in the FDP space, as recently seen with the shift to AMOLED displays for mobile devices.

While the above secular tailwinds are expected to drive around 4% annual growth in the photomask industry, Photronics is well positioned to grow at least in line with the market. This is due to its heavy exposure to Asia, which represented 80% of its 2023 revenues, as this region is expected to grow the fastest. Its leadership in AMOLED and massive cash reserves of over $500 million (with no debt) are additional strong arguments for market share gains....

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