2023-05-25 15:10:28 ET
Summary
- The stock has done very well in recent weeks, but the time has come to reduce risk now that the stock is likely to pull back.
- The latest report got the stock rolling since it called for the worst to have passed, but it also suggests the road to recovery will be a long one.
- Multiples for AOSL are low in certain aspects, but there is also a good reason why they are where they are.
- The stock is likely to pull back in the short term, which means there is one thing to do if preservation of capital is important.
Alpha and Omega Semiconductor ( AOSL ) has been on a roll lately. The stock hit a new low for the year as recently as May 5, but the stock recovered and AOSL has gained close to a third in the last few weeks, thanks in part to an improved outlook that states the worst of the recent downturn has passed. However, the stock may now be at a turning point. Why will be covered next.
AOSL is a volatile stock
The chart below shows how the stock has gone up and down in 2023. In fact, the stock changed directions on several occasions. For instance, the stock fell 12.8% on February 7, which ended the rally with which AOSL started out the year and which saw AOSL gain as much as 16.1% by February 3. The opposite happened on May 5 when the stock proceeded to go on a huge rally after the stock hit an intraday, 2023 and 52-weeks low of $20.64.
These moves did not happen for no reason. Both dates coincided with the release of an earnings report by AOSL, the most recent one being the Q3 FY2023 report. The Q2 report that preceded the Q3 report disappointed by not only missing quarterly estimates, but it also included guidance that missed expectations by a mile due to a slump in demand. The Q3 report, however, showed enough to believe the worst has passed.
The stock fell 11.6% to $20.64 early on May 5, only to stage a strong rebound to end the day up 3.2%, which set the stage for a rally that saw the stock appreciate by about a third. Furthermore, there appears to have been another factor that caused the stock to bounce the way it did. The stock seems to have hit support. The stock made it all the way back to a Fibonacci level, which may have encouraged buyers to step in with potential support close by. Starting from the March 2020 low of $5.82 to the March 2022 high of $69.99, the 76.4% Fibonacci retracement of this uptrend is $20.96.
However, while AOSL seems to have found support, it also seems to have encountered resistance. The stock got as high as $27.76 on May 22, capping off a rally that saw the stock appreciate by 34.5% in less than three weeks starting from the May 5 low of $20.64, but the stock has since struggled to go higher. It appears there is resistance in the $27-28 region, especially since there are numerous past instances of the stock getting stopped in its track in the $27-28 region.
For instance, the stock was unable to get past $27-28 in February and March. It's also worth noting how the stock was able to halt its decline in October and December of last year in the same $27-28 region when it was trading above it, a sign of support. It is said that what used to be support becomes resistance once support has been breached and this appears to be what has happened to AOSL. What used to be a support in the $27-28 region is now resistance in the $27-28 region.
What this means is that with the stock close to resistance, there is a good chance the stock will be changing direction in the near future. That is unless the stock is able to break resistance, but that is less likely. Longs may want to take some, if not all, chips off the table since the stock is more likely to be trading lower than higher in the short term. The stock is currently down 4.6% YTD.
Why AOSL has rallied in recent weeks
As mentioned previously, the stock turned it around on May 5 after the release of the Q3 FY2023 report. Keep in mind that the Q3 report followed in the wake of the Q2 report, which badly missed estimates for earnings and guidance. This time, however, the Q3 report was an improvement compared to the one before, although still somewhat of a mixed card.
Q3 revenue actually surpassed estimates with a decline of 34.8% YoY to $132.6M, but AOSL also posted a bigger-than-expected non-GAAP loss of $0.21 per share. In terms of GAAP, AOSL posted a GAAP loss of $18.9M or $0.68 per share. The main difference between the GAAP and non-GAAP number is that the latter excludes share-based compensation amounting to $0.38.
The weighted average of shares outstanding decreased from 28.4M a year ago to 27.7M due to share buybacks. AOSL finished the quarter with $265.9M in cash and cash equivalents on the balance sheet, down from $314.4M a year ago. Long-term debt was $41.2M. The table below shows how the numbers in Q3 FY2023 continued their recent decline.
(Unit: $1000, except for EPS) | |||||
(GAAP) | Q3 FY2023 | Q2 FY2023 | Q3 FY2022 | QoQ | YoY |
Revenue | 132,560 | 188,760 | 203,239 | (29.77%) | (34.78%) |
Gross margin | 23.2% | 28.1% | 35.6% | (490bps) | (1240bps) |
Operating income (loss) | (14,402) | 8,785 | 31,232 | - | - |
Net income (loss) (attributable to AOSL) | (18,907) | 6,337 | 31,650 | - | - |
EPS | (0.68) | 0.21 | 1.11 | - | - |
(Non-GAAP) | |||||
Revenue | 132,560 | 188,760 | 203,239 | (29.77%) | (34.78%) |
Gross margin | 25.1% | 29.5% | 36.7% | (440bps) | (1160bps) |
Operating income (loss) | (2,854) | 22,797 | 40,537 | - | - |
Net income (loss) (attributable to AOSL) | (5,876) | 19,960 | 38,220 | - | - |
EPS | (0.21) | 0.67 | 1.34 | - | - |
Source: AOSL Form 8-K
However, the outlook was more positive. Guidance calls for Q4 FY2023 revenue of $155-165M, a decline of 17.5% YoY at the midpoint, but also an increase of 20.7% QoQ, which surpassed expectations of $156M in revenue.
(GAAP) | Q4 FY2023 (guidance) | Q4 FY2022 | YoY (midpoint) |
Revenue | $155-165M | $194.0M | (17.53%) |
Gross margin | 23.0-25.0% | 32.6% | (860bps) |
In addition, management believes the worst has passed. Quarterly results are expected to improve, although demand remains weak. From the Q3 earnings call:
"As for the broader market environment, end consumer demand continues to be weak. However, we are optimistic that the worst is behind us, given the intensity of the inventory correction, coupled with our proactive measures.
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."
A transcript of the Q3 FY2023 earnings call can be found here .
The combination of higher revenue and better margins should help the bottom line. Consensus estimates predict non-GAAP EPS of $0.02 on revenue of $156M in Q4 FY2023. Estimates predict AOSL will thus finish with non-GAAP EPS of $1.69 on revenue of $686M in FY2023. In comparison, AOSL earned $4.56 on revenue of $777.6M in FY2022.
Still, while Q3 FY2023 was the trough and the numbers are expected to improve, AOSL does not believe the recovery will be V-shaped. In other words, AOSL does not believe there will be a quick return to the record earnings seen in 2021-2022.
"Right now, it's still a bit murky in terms of the visibility of the end demand. But that said, we are expecting the component level inventory correction to continue to improve going into the September quarter.
I don't think that the demand will be back to what it was originally, and typically, that September quarter is a peak season. But the end demand, I think, isn't quite there yet. I think it's still be more of the impact of the relief from the inventory control abating."
Keep in mind that the record earnings seen in 2021-2022 were made possible by what were arguably once-in-a-lifetime circumstances, specifically the COVID-19 pandemic. The pandemic resulted in unprecedented amounts of fiscal and monetary stimulus, which helped boost demand for semiconductor chips, including the power chips from AOSL. This factor won't be around to assist AOSL going forward.
Valuations are appealing in some ways
The table below shows some of the multiples AOSL trades at. In some ways, AOSL looks relatively cheap. For instance, the stock trades below book value, which some see as a sign of a stock is undervalued. Note that AOSL has an enterprise value of $588.6M after taking into account the cash reserves AOSL holds. AOSL still holds an equity stake in the joint venture in Chongqing, China. This stake is valued at $368B on the books in the Q3 FY2023 report.
AOSL | |
Market cap | $760.34B |
Enterprise value | $588.59B |
Revenue ("ttm") | $723.8M |
EBITDA | $77.4M |
Trailing non-GAAP P/E | N/A |
Trailing non-GAAP P/E | 16.40 |
Trailing GAAP P/E | 28.16 |
Forward GAAP P/E | 461.00 |
PEG ratio | N/A |
P/S | 1.05 |
P/B | 0.87 |
EV/sales | 0.81 |
Trailing EV/EBITDA | 7.60 |
Forward EV/EBITDA | 6.12 |
Source: Seeking Alpha
On the other hand, earnings have really dropped off from where they were. As recently as Q1 FY2023, AOSL posted GAAP EPS of $0.88 and non-GAAP EPS of $1.20, which turned into negative $0.68 and $0.21 in Q3 FY2023. AOSL is likely to end FY2023 with a GAAP loss. While the numbers going forward are unlikely to be as bad as Q3 FY2023, which suffered from a severe case of inventory correction, they are unlikely to match the record highs of 2021-2022 anytime soon.
Investor takeaways
I was formerly bullish on AOSL as stated in a previous article , but I turned neutral on AOSL after the early rally to the year and I remain so after all the latest moves. The stock is very likely due for some sort of pullback after appreciating by a third in less than three weeks. The stock is close to a resistance level that seems to be a rather potent one, considering how often it has been at the center of major turning points in recent history.
Overcoming the $27-28 region was not easy when it provided support and it won't be easy to overcome now that it is resistance. While resistance can be breached, the odds are in favor of the stock going lower. The stock has changed directions in the $27-28 region numerous times in the last 12 months, which means one should be prepared for it to happen once again.
While the trough is in the rear view and the quarterly numbers are expected to get better, the path to a full recovery is likely to be a long one. AOSL is unlikely to match the record earnings seen in 2021-2022 anytime soon since they were made possible by extraordinary circumstances that won't be there going forward. This is not to say AOSL cannot one day get back to challenging the record highs. It's just not going to happen in the near term.
There is some potential upside in AOSL if, for instance, the joint venture company goes public in China and the equity stake of AOSL jumps in value as a result. This stake already accounts for a large portion of AOSL's book value. If AOSL were to announce the joint venture going public, the stock could go on a major run in anticipation of the equity stake increasing in value after an IPO. However, at this time, there are no updates in terms of a listing for the joint venture company, but it's not something that can be ruled out.
Bottom line, it's time to be careful with AOSL after the major run in recent weeks. The prudent move is to take some or all chips off the table. If the stock manages to break through resistance in the $27-28 region, then bulls can come back to the table. On the other hand, if the stock goes for the much more likely scenario and starts to pull back, longs can pat themselves on the back for having dodged a bullet.
For further details see:
Alpha And Omega Semiconductor: Time To Be Cautious