2023-09-20 01:35:47 ET
Summary
- The stock price has fallen below book value, which some see as a sign it is time to go long MX, but that alone is not necessarily enough.
- MX is deep in the red for a host of reasons, some of which are likely temporary in nature, but also some that may not go away easily.
- A turnaround might be close at hand, assuming MX manages to snag new customers, especially with the introduction of new products for the automotive market.
- MX has the potential to become a winner where it is at, but it is also risky in the sense that it could lead to a losing bet.
Magnachip Semiconductor ( MX ) saw its stock hit a new multi-year low on September 15, the latest one in a long decline that started all the way back in early 2021 or more than two years ago. With such a long decline, some may be wondering if the stock is worth considering. After all, MX has some intriguing attributes like, for example, trading below book value. Still, there are other factors to consider, which may keep others away. Why will be covered next.
MX is in a rut
A past article from almost three years ago rated MX a buy as it noted how MX was accorded a low, and some could even say too low, valuation with MX having, for instance, nearly as much cash compared to its market cap, which the article theorized could allow the stock to take off. This turned out to be prescient because the stock did go on a strong rally in the following months, especially after the proposed buyout of MX by Wise Capital, which valued MX at $1.4B or about $29 per share.
However, the proposed transaction encountered regulatory opposition and after a long process was eventually terminated by the end of 2021. The market did not react well to the lack of a deal after the post-buyout rally and the stock started a long decline that continues to this day. The chart below shows how the stock peaked in early 2021 before going down.
Keep in mind the stock was held up for a while by the prospect of another buyout proposal. The stock’s descent accelerated in the second half of 2022 when it became clear no new buyers were to present themselves. In addition, the semiconductor market, which had seen rapid expansion, started to enter a downturn due to weak demand in end markets. Supply chain disruptions did not help either. All this pulled the stock lower.
Why long MX is worth considering
The chart above shows how MX has lost 16.6% YTD. The stock got as high as $26.98 in April 2021 and the stock closed at $7.83 on September 15, 2023, which means the stock has lost 71% of its value over the last 2.5 years. Such a drop will leave its mark. For instance, if we take a look at the balance sheet, MX has a book value of $364,292,000 with total assets of $443,735,000 and total liabilities of $79,443,000 as of Q2 FY2023.
This book value of $364.3M translates to a book value of $8.73 per share with 41,741,310 shares outstanding, which means MX is trading below book value with a stock price of $7.83 or a market cap of $328.08M. An argument can be made that fair value for a company like MX should be around $8.73 since that is what MX, which is unprofitable by every measure, would be worth upon liquidation. Some might therefore conclude that MX is undervalued due to this. Note that MX has cash and cash equivalents of $172.95M or $4.13 per share, which means more than half the market cap is cash.
However, there is usually a reason why a stock falls below book value, and in the case of MX, it is arguably justified due to expectations of continued losses at MX. MX used to have roughly $542M in cash after the sale of the Foundry Services group in September 2020, a transaction valued at $435M, including $350.6M in cash. Much of this cash was used for stock buybacks, which is set to continue with another $50M recently authorized, but MX being in the red also played a big role in causing the decline in cash.
MX lost $3.9M or $0.09 per share in terms of GAAP and $2.47M or $0.06 per share in Q2 FY2023 and losses could have been bigger if not for gains on forex. In the last 12 months, MX has lost $0.89 per share in terms of GAAP and $0.64 per share in terms of non-GAAP. The table below shows the numbers for Q2 FY2023. Note how the weighted-average of shares declined due to stock buybacks. In Q2 FY2023, MX used roughly $25M to buy back 2.5M shares.
(Unit: $1000, except for EPS) | |||||
(GAAP) | Q2 FY2023 | Q1 FY2022 | Q2 FY2022 | QoQ | YoY |
Revenue | 60,979 | 57,005 | 101,376 | 7.0% | (39.8%) |
Gross profit margin | 22.2% | 21.2% | 28.6% | 100bps | (640bps) |
Operating income (loss) | (10,656) | (21,818) | 2,002 | - | - |
Net income (loss) | (3,947) | (21,470) | (3,340) | - | - |
EPS | (0.09) | (0.49) | (0.07) | - | - |
Weighted-average shares outstanding | 41,741K | 43,390K | 44,897K | ||
(Non-GAAP) | |||||
Adjusted EBITDA | (3,594) | (7,873) | 8,525 | - | - |
Operating income (loss) | (7,762) | (12,249) | 4,787 | - | - |
Net income (loss) | (2,472) | (10,367) | 10,567 | - | - |
EPS | (0.06) | (0.24) | 0.23 | - | - |
Weighted-average shares outstanding | 41,741K | 43,390K | 45,937K |
Source: MX Form 8-K
Notice how the Q2 numbers did improve QoQ. This may continue with guidance calling for Q3 FY2023 revenue of $59-65M, which is down YoY, but also up QoQ. Consensus estimates predict MX will report a non-GAAP loss of $0.17 per share.
(GAAP) | Q3 FY2023 (guidance) | Q3 FY2022 | YoY (midpoint) |
Revenue | $59-65M | $71.2M | (12.92%) |
Gross profit margin | 22.5-24.5% | 24.2% | (70bps) |
Could MX get out of the red?
It’s true MX is trading below book value, which is something sure to draw interest, but this is because the market believes losses will continue, which will eat into the cash reserves and in turn lower book value. The balance sheet looks fine with sizable cash reserves and no debt, but this is offset by all the red numbers on the income statement.
MX is in negative territory whether in terms of net income, GAAP or non-GAAP, EBITDA or free cash flow. This is due to a congruence of factors. The after-effects of supply chain disruptions in the wake of COVID-19 are still rippling through at MX. Semiconductor demand is down in general. Demand for display drivers has fallen as a result of weak demand for display panels, including in the smartphone market. MX is also spending heavily on new chip designs, all of which are pulling down the numbers.
If MX is to be worth it, MX must show it can become profitable again. However, it’s this prospect that is clouded by uncertainty. On the one hand, MX is sure to recover from the supply chain issues that led to MX missing out on potential sales, especially for OLED display drivers. MX is also working hard on winning new orders, including with the release of new products like IGBT chips for the automotive industry. From the Q2 earnings call:
“in our Power business, our product design-in/win rate is stronger than ever and we’re rolling out next-generation power products throughout this year. Looking ahead, we are seeing some improvements in our customer base, and we expect further sequential growth in Q3.
In our Display business, we’re very optimistic about the long-term growth of our OLED business. We continue to collaborate closely with our new global panel customer and we are excited about the additional new products that we are rolling out in the next six months. These new products offer compelling competitive advantages and are strategically aimed at tapping into the rapidly expanding OLED market in the Asian region.”
A transcript of the Q2 FY2023 earnings call can be found here .
It appears potential customers are interested, although this has yet to translate into firm commitments. Soft end-use demand is probably playing a role here. The automotive market is in better shape, but the OLED market is suffering from a weak market for display panels. Rising competition is also an issue. Unlike the past, the number of suppliers of OLED display drivers has gone up, including in China, a market MX is targeting. MX is not guaranteed to be selected as a supplier.
MX does seem optimistic sales will grow in the coming quarters as new products make their entry, but whether it will be enough to get rid of the losses is hard to say. MX was once profitable, but that MX was for all intents and purposes a different company from the one it is today. MX was once primarily known as a supplier of OLED drivers and as a foundry to a lesser extent, but the foundry business is on the way out and the OLED market is very different now, being much more fragmented with more manufacturers. The circumstances are different and MX may not necessarily be a winner in this new market.
Investor takeaways
MX is deep in the red and likely to remain so for the time being. That alone makes MX a risky bet. On the one hand, if MX manages to secure new customers for all the products it has in the pipeline, then MX should become profitable again. The key here is that MX needs to beat out alternative suppliers and sign up customers for sales to grow and earnings by extension.
On the other hand, if MX suffers delays in securing enough customers or the semiconductor market stays soft, then the stock could have further drop. MX has substantial cash reserves to absorb losses, but they’re down from where they used to be. Keep in mind MX has allocated another $50M to buybacks, which is enough to buy back at least 7M shares with the stock priced at $7+. This could give the stock a lift.
I am on the fence on this one and I may come to regret not taking a shot at MX like three years ago, which turned out to be a great move, but I am going with being neutral on MX, at least for now. While MX is now trading below book value, that alone is not enough for long MX. The stock price is below book value because the market believes book value is set to go down due to continued losses.
MX needs to show it can become profitable once more, and while there are some encouraging signs, more needs to happen to take away all doubts some might have about MX. On paper, MX has a more than decent shot at completing a turnaround. The EV market, for instance, is rapidly growing and at least some of the new products from MX should be able to secure sales.
It’s not that long MX does not make sense at this point. Now might actually be the time to go long MX with the stock down big and the company possibly on the verge of new customers being added. The QoQ improvement is a positive sign and if this continues, those long could be rewarded for doing so. MX was once valued at $1.4B for a reason at one point, about a quarter of its current market cap. MX is at the very least worth keeping an eye on, even if someone does not believe the time is right for long MX.
Bottom line, in the end, it comes down to how much of a shot MX has at improving the income statement. MX has a lot of potential deals lined up, which could power a turnaround, but whether anyone will translate into the bottom line remains to be seen. Those more willing to gamble might want to roll the dice on MX as the payoff could be substantial. Others may want to wait for a while before committing.
For further details see:
Magnachip Semiconductor: May Be Worth Another Look - With A Major Caveat