2023-08-22 12:08:27 ET
Summary
- The latest report was not only much better than expected earnings-wise, but the outlook suggested the worst of the downturn has passed.
- The stock has rallied in the last three months, gaining over 70+%, but the stock has now fallen below the uptrend that was in place during this time.
- Multiples are currently way above where they have tended to trade, which might explain why the stock has faltered in spite of a good report.
- Some might understandably go for long AOSL, but others may refrain from doing so, depending on what arguments they attach the most weight to.
Alpha and Omega Semiconductor ( AOSL ) closed the books on FY2023 with the release of the Q4 report on August 9. In general, FY2023 was a “down” year for AOSL. Revenue, margins and earnings, for instance, all saw big drops after what was a record-setting year in FY2022. However, AOSL was able to end the year on a strong note. Why will be covered next.
AOSL bounces back after dropping off
AOSL was coming off a year in which the top and the bottom line reached record highs in FY2022. So AOSL had a high hurdle to cross if it were to top FY2022 in FY2023, which meant people had to account for the possibility of some sort of moderation after growing as fast as it did. As it turned out, AOSL got off to a good start in FY2023 with Q1 revenue reaching a new high, but that was as good as it got.
The table below shows how the FY2023 numbers declined in comparison to FY2022. FY2023 revenue declined by 11% YoY to $691.3M and non-GAAP EPS declined by 59.2% YoY to $1.86. Note that AOSL reduced its stake in the JVC in China in Q2 FY2022. This resulted in a gain of $399M in FY2022, which in turn raised GAAP EPS by $14.04 to $16.07, skewing the YoY comparisons.
AOSL finished FY2023 with cash and cash equivalents of $195.2M and long-term debt of $38.4M. In comparison, they stood at $314.4M and $42.5M, respectively, at the end of FY2022. Remember that AOSL is in the process of expanding the Oregon Fab. AOSL spent $19M in capex in the June quarter and it expects to spend another $15-20M in the September quarter. The stake in the JVC is listed as an equity investment method on the balance sheet and valued at $366.6M at the end of FY2023.
(Unit: $1000, except EPS) | |||
(GAAP) | FY2023 | FY2022 | YoY |
Revenue | 691,321 | 777,552 | (11.09%) |
Gross margin | 28.9% | 34.5% | (560bps) |
Operating income (loss) | 22,529 | 102,038 | (77.92%) |
Net income (loss) | 12,364 | 453,163 | (97.27%) |
EPS | 0.42 | 16.07 | (97.39%) |
(Non-GAAP) | |||
Revenue | 691,321 | 777,552 | (11.09%) |
Gross margin | 30.2% | 35.6% | (540bps) |
Operating income (loss) | 63,920 | 137,639 | (53.56%) |
Net income (loss) | 55,013 | 128,637 | (57.23%) |
EPS | 1.86 | 4.56 | (59.21%) |
Source: AOSL Form 8-K
As mentioned earlier, AOSL got off to a good start in FY2023, but the numbers quickly declined, culminating in a non-GAAP loss of $5.9M or $0.21 per share in Q3. A previous article goes into further detail as to why the Q3 numbers dipped as much as they did. However, AOSL was able to bounce back to a certain extent in the last quarter of FY2023. The table below shows how Q4 improved sequentially, although it still declined on a YoY basis.
Note that Q4 revenue of $161.5M surpassed expectations by $5.7M and non-GAAP EPS of $0.19 was as much as $0.17 more than expected. The latter was in part due to gross margin that was way above the forecast of 23-25%, which was in turn the result of a better product mix and higher license and engineering service revenue.
In terms of GAAP, AOSL ended Q4 with a loss of $1.1M or $0.04 per share. The difference between the GAAP and non-GAAP number can be attributed mostly to $3.4M or $0.11 per share of share-based compensation expense and $2.9M or $0.10 per share loss due to equity method investment, both of which are included in the former, but not in the latter.
(Unit: $1000, except for EPS) | |||||
(GAAP) | Q4 FY2023 | Q3 FY2023 | Q4 FY2022 | QoQ | YoY |
Revenue | 161,525 | 132,560 | 193,959 | 21.85% | (16.72%) |
Gross margin | 27.6% | 23.2% | 32.6% | 440bps | (500bps) |
Operating income (loss) | 2,612 | (14,402) | 18,140 | - | (85.60%) |
Net income (loss) (attributable to AOSL) | (1,104) | (18,907) | 15,091 | - | - |
EPS | (0.04) | (0.68) | 0.53 | - | - |
(Non-GAAP) | |||||
Revenue | 161,525 | 132,560 | 193,959 | 21.85% | (16.72%) |
Gross margin | 28.5% | 25.1% | 33.8% | 340bps | (530bps) |
Operating income (loss) | 6,892 | (2,854) | 28,905 | - | (76.16%) |
Net income (loss) (attributable to AOSL) | 5,723 | (5,876) | 27,115 | - | (78.89%) |
EPS | 0.19 | (0.21) | 0.95 | - | (80.00%) |
Source: AOSL Form 8-K
The Q4 results were a surprise and the earnings release included the following statement with additional comments with regards to Q4. AOSL saw a recovery in certain market segments, which led AOSL to conclude the worst is likely over.
“Our performance this quarter was driven by a solid recovery across notebook and desktop computing applications and strength in our diversified customer base and product portfolio in Power Supply and Industrial end markets. Even though broader market consumer demand continues to be weak, we are optimistic that the worst phase of this cycle is behind us.”
Keep in mind that a sequential improvement was telegraphed beforehand by AOSL after Q3 saw the numbers take a big dip. From the Q3 FY2023 earnings call :
“Looking into the rest of the year, we expect to recover a good portion of the revenue decline in the upcoming June quarter, with further improvement expected in our seasonally strongest September quarter.”
AOSL is sticking with the previous forecast. The September quarter or calendar Q3 is expected to improve upon the June quarter, just as June improved upon the March quarter. From the Q4 FY2023 earnings call:
“Recall from our prior quarter call, we said our calendar Q1 results reflected our efforts to bring customer inventory levels back into balance as quickly as possible. We were confident then that due to our resilient fundamentals, we would see a swift recovery in Q2 and continued recovery in Q3 as we go into our peak season. I'm happy to report that it is playing out in line with our expectations.”
A transcript of the Q4 FY2023 earnings call can be found here .
Accordingly, Q1 FY2024 guidance is calling for revenue of $170-190M, a decline of 13.7% YoY, but also an increase of 11.4% QoQ at the midpoint. Gross margins are not expected to change much QoQ. With these datapoints, AOSL is estimated to post non-GAAP EPS of $0.32 on revenue of $180M. This is way less than the $1.20 in Q1 FY2023, but more than the $0.19 in Q4 FY2023.
(GAAP) | Q1 FY2024 (guidance) | Q1 FY2023 | YoY (midpoint) |
Revenue | $170-190M | $208.5M | (13.67%) |
GAAP gross margin | 26.2-28.2% | 34.1% | (690bps) |
Non-GAAP gross margin | 27.5-29.5% | 35.4% | (690bps) |
Source: AOSL Form 8-K
The coast is clear for AOSL or is it?
AOSL has been negatively affected by the downturn in demand for power semiconductors, but the latest updates suggest the worst of the downturn has passed with Q3 FY2023 the trough. However, before concluding the bottom is in, it’s worth pointing out that AOSL experienced a similar sequential improvement in Q1 FY2023, in part due to seasonal trends, before the bottom fell out in the following quarters.
For instance, non-GAAP EPS went from $1.20 in Q1 FY2023 to minus $0.21 in Q3 FY2023, which shows how quickly the tide can change for AOSL. It’s not impossible for AOSL to experience a drop-off once Q1 FY2024 is in the rear view. Q1 FY2024 could turn out to be the peak, just as Q1 FY2023 turned out to be the peak.
Q1 FY2023 was followed by a valley and it remains to be seen if Q1 FY2024 will also be followed by a valley. Keep in mind that while the numbers have improved QoQ, they are still way below YoY as a result of soft demand in most end markets, including the PC and smartphone market. Many companies have acknowledged being confronted with a demand environment that was weaker than anticipated and such an environment, while it is possible for a single company like AOSL to go against the trend and outperform, makes unexpected setbacks a possibility.
This uncertainty might explain why the stock was unable to sustain the post-earnings pop that followed in the wake of the Q4 FY2023 report. The chart below shows how the stock gained 7.8% after the FY2023 report, only for the stock to turn south in the days that followed. The stock peaked at $35.40 after earnings, which means the stock has lost 12.5% after closing at $30.99 on August 18.
This slide pushed the stock below the 50-day moving average, which might cause some traders to turn short-term bearish on AOSL. On the other hand, the stock was probably due for a pullback after appreciating by 71.5% in three months from May to August, going from a low of $20.64 to a high of $35.40. Still, the stock has fallen below the uptrend that had been in place since May as shown above.
Multiples may also have been a factor as to why the stock has been sliding even though the latest report came in significantly better than expected. While some multiples look okay, others are less so. For instance, AOSL trades at over 26 times forward non-GAAP earnings, which is not only above the sector median at 22.9x, but also more than twice the 5-year average of 11.3x for AOSL.
AOSL | |
Market cap | $851.88M |
Enterprise value | $735.49M |
Revenue (“ttm”) | $691.3M |
EBITDA | $65.7M |
Trailing non-GAAP P/E | N/A |
Forward non-GAAP P/E | 26.49 |
Trailing GAAP P/E | 73.79 |
Forward GAAP P/E | N/A |
PEG GAAP | N/A |
P/S | 1.24 |
P/B | 0.97 |
EV/sales | 1.06 |
Trailing EV/EBITDA | 11.19 |
Forward EV/EBITDA | 6.11 |
Source: SeekingAlpha
Keep in mind that these multiples assume there won’t be a drastic decline in earnings like what happened in FY2023. AOSL is projected to earn $0.32 in Q1 as stated earlier and even if it were to earn a similar amount the rest of the year, resulting in EPS of $1.28 at the end of FY2024, AOSL would still trade with a P/E ratio of 24.2 and the stock priced at $30.99.
However, the first quarter of the fiscal has the benefit of several tailwinds, such as the release of various flagship smartphones in the fall, but these tailwinds tend to lose strength as the fiscal goes by. Lower earnings are possible in the latter part of FY2024, depending on various factors, including whether consumer spending holds up, which can determine whether sales of PCs, smartphones and other consumer goods holds up or falls off once the holidays have gone.
Investor takeaways
AOSL has bounced back in several ways. The stock hit a 52-week low of $20.64 on May 5, resulting in a YTD loss of 27.8% at that point, but a powerful rally in the last three months, which culminated in the release of the FY2023 report, resulted in a gain of 71.5% for AOSL. The stock has since lost 12.5%, which pushed YTD gains to 8.5% for AOSL.
The stock reacted well at first to the Q4 and FY2023 report, which came in much better than expected. The latest report suggested AOSL has left behind the worst of the downturn that resulted in substantial drops in the top and the bottom line in FY2023. While AOSL has ways to go to come close to matching the record highs, the outlook suggests AOSL is on the right path to recouping recent setbacks. Growth is back.
However, it’s too early to tell if the recent rally can be sustained. It’s interesting that AOSL was able to see an uptick in demand when the overall market for power semiconductors is by most accounts still sluggish. AOSL might be executing well, but it might also be due to temporary tailwinds that will gradually lose their potency as FY2024 progresses, which is not that different from what happened in FY2023.
There is reason to believe the recent rally that saw the stock appreciate by as much as 71.5% was overdone. Multiples are higher than most in the sector and way above their long-term average, and that’s after a 12.5% reduction in the stock price. AOSL is better off right now than it was several months ago, but whether the coast is clear is clear remains to be seen. AOSL has made progress, but a lot more needs to happen for AOSL to say the downturn is truly over.
It’s tempting to be long AOSL after the latest quarterly results/guidance and the way the stock has performed in recent months, but I am neutral on AOSL. A look back at recent history shows that AOSL is no stranger to huge moves up in the stock like the recent one, just as it has demonstrated its ability to lose it all just as quick.
AOSL is a volatile stock, which is why it’s better not to get in when the stock has already rallied a great deal. It’s better in terms of risk control to consider going long after the stock has sold off. Currently, the charts are leaning somewhat bearish and multiples suggest the stock could use a cut in price, being far above where they tend to trade.
Bottom line, the latest report is cause for optimism. AOSL looks to be on the right path, even if there is still a lot to do. Some might want to be long AOSL for these reasons, but others may want to keep in mind the various points covered above. There is no right or wrong on this one. Some may want to play it safe, while other are more risk tolerant. It’s up to the individual to decide which approach they are most comfortable with.
For further details see:
Alpha and Omega Semiconductor: Comes Back Strong In Multiple Ways