2024-01-12 08:19:21 ET
Summary
- The stock has stalled after staging a rebound in late 2023, but there is reason to believe the stock may not be done going down.
- The recent Analyst Day reaffirmed why there are reasons to long PDFS, which included an upgrade to the long-term outlook.
- While the company itself has outperformed, including during the recent industry downturn, it’s worth noting that the stock has underperformed.
- Long PDFS has its merits as an argument, but the time for doing so may not be right, especially if the stock has further to fall.
PDF Solutions (PDFS) was in danger of ending 2023 down for the year after soaring higher earlier in the year, but a late rally helped PDFS finish with a respectable gain for 2023. The stock appears to have ended its long slide, but it seemed to have required an upgrade to the long-term growth outlook on the part of PDFS. Still, the stock has gone flat in recent weeks and it is possible the stock may resume the slide. Why will be covered next.
The slide comes to a halt, but a resumption is not out of the question
Up until fairly recently, shorting PDFS looked like a solid bet with the stock in the midst of a major slide. Yet a previous article from October 2023 rated PDFS a hold even though the stock continued to fall after noting how the upcoming November report could be the catalyst to shake things up, especially since the prior earnings reports had done exactly that with major stock moves following the releases.
The actual report was somewhat of a mixed bag even though it handily beat earnings estimates, but PDFS preempted the report by essentially preannouncing company results at the latest Analyst Day held a few weeks earlier in late October. The chart below shows how the stock bottomed in late October and started to recover afterward.
If not for the late recovery, PDFS could have ended 2023 with a loss instead of a gain of 12.7%. Keep in mind that PDFS has actually underperformed against most semis since most managed to score much bigger gains. The iShares PHLX Semiconductor ETF (SOXX), for instance, an ETF which tracks the stocks of 30 companies competing in the semiconductor space, gained 66% in 2023 in comparison.
On the other hand, it's worth noting how the stock has flatlined in recent weeks in the chart above. The rally got as high as $34.09 on December 22 after a quick spike, but it's been hovering close to $30 or so for some time. PDFS is off to a weak start to 2024, being down 3.6% YTD with the stock closing at $30.99 as of January 10.
Furthermore, it's worth noting how the rebound came to an end in a region where it had previously found support. Note how, for instance, the stock bounced in May and August once the stock got to the $32-34 region. It is said that what used to be support tends to become resistance once breached and this is what appears to have happened to PDFS.
There may also be another reason why the stock came to a halt where it did. The stock went down from the July 2023 high of $48.02 to the October 2023 low of $26.12, which means the move upwards following the October bottom could be considered as nothing more than a retracement of the aforementioned move downwards.
In fact, it's worth mentioning that the 38.2% Fibonacci retracement from $48.02 to $26.12 is $34.49, which is close to $34.09 or where the stock topped out recently on December 22. Interestingly, the next Fibonacci level is 50% at $37.07, which is close to the $37.17 the stock touched back in August 2023 before resuming the decline.
So if PDFS is to go higher, it will have to first get past resistance at $34 or so. In addition, it also leaves open the possibility the stock may resume the slide of the recent past. If the way higher is blocked by resistance, then a move lower may be necessary to find support. This could require a retest of the recent low, which could take it back to the October low and perhaps even lower.
Why the stock was relieved by the latest outlook at the Analyst Day
It's no coincidence the slide ended shortly after the most recent Analyst Day. The report provided an early preview into the upcoming quarterly report. Among other things, PDFS presented its latest financial model, which included an upgrade to the long-term outlook, if only a modest one. The new model calls for annual revenue to grow by more than 20%, which is slightly faster than the CAGR of 20% in the preceding five years.
The model targets a non-GAAP gross margin of more than 75%, which is at least 10 percentage points higher than five year ago when gross margin was 65% in FY2019. On the other hand, non-GAAP operating margin is expected to stay at 20% because PDFS intends to make further investments, including in sales and marketing for continued growth.
Whether coincidence or not, the above seemed to have gotten the approval of the market. Furthermore, the stock got an additional lift a few weeks later after the release of the Q3 report. For instance, management reiterated what it had stated before during the Analyst Day, which is that FY2023 revenue is expected to grow in the low teens YoY.
FY2022 revenue was $148.5M, which suggests FY2023 revenue will end up around $166M, assuming YoY growth of about 12%. From the Q3 earnings call:
"we continue to expect that our full year 2023 revenue growth rate will be in the lower double digits on a year-over-year percentage basis. We believe that against the backdrop of the macro environment that John has spoken about, where semiconductor growth has not been as strong this year as last few years, we at PDF can continue to grow ahead of the market.
Our confidence stems from the strength of our platform approach and increasing customer engagements we see in our sales pipeline. Additionally, we remain committed to the total company long-term growth rate of greater than 20% announced at our Analyst Day."
A transcript of the Q3 FY2023 earnings call can be found here .
In addition, the Q3 report beat earnings estimates, although it fell short on revenue. The consensus expected non-GAAP EPS of $0.15, but PDFS reported $0.20 on revenue of $42.35M. In terms of GAAP, PDFS reported a net loss of $4.97M or $0.13 per share, which was primarily the result of an income tax expense to the tune of $6M. The table below shows the numbers for Q3 FY2023.
Integrated Yield Ramp revenue was $2.9M and Analytics revenue contributed the remaining $39.5M, which means the latter accounted for 93% of total revenue. So there continues to be an ongoing shift towards analytics at PDFS. In comparison, analytics accounted for 58% of revenue five years ago in FY2019.
(Unit: $1000, except for EPS, margins and shares) | |||||
(GAAP) | Q3 FY2023 | Q2 FY2023 | Q3 FY2022 | QoQ | YoY |
Revenue | 42,350 | 41,601 | 39,860 | 1.80% | 6.25% |
Gross margin | 66% | 70% | 69% | (400bps) | (300bps) |
Net income (loss) | (4,972) | 6,835 | 1,385 | - | - |
EPS | (0.13) | 0.17 | 0.04 | - | - |
Weighted-average shares outstanding | 38,187K | 39,076K | 38,054K | (2.28%) | 0.35% |
(Non-GAAP) | |||||
Revenue | 42,350 | 41,601 | 39,860 | 1.80% | 6.25% |
Gross margin | 70% | 74% | 72% | (400bps) | (200bps) |
Net income | 7,987 | 7,496 | 7,575 | 6.55% | 5.44% |
EPS | 0.20 | 0.19 | 0.20 | 5.26% | - |
Weighted-average shares outstanding | 38,992K | 39,076K | 38,054K | (0.22%) | 2.47% |
Source: PDFS Form 8-K
What could drive the stock down
Wall Street is rather bullish on PDFS. The average price target for PDFS is $45 with four strong buys, well above the current stock price of $30.99. On the other hand, PDFS could be seen as a rather pricey stock with multiples where they are. For instance, PDFS has a P/E ratio in the high thirties/low forties and that's in terms of non-GAAP. In terms of GAAP, it's much higher. The table below shows how some of the more commonly used multiples are significantly higher than the median.
PDFS | Sector median | |
Market cap | $1.17B | - |
Enterprise value | $1.04B | - |
Revenue ("ttm") | $165.2M | - |
EBITDA | $10.7M | - |
Trailing non-GAAP P/E | 39.82 | 21.36 |
Forward non-GAAP P/E | 42.01 | 23.72 |
Trailing GAAP P/E | 436.71 | 27.24 |
Forward GAAP P/E | 438.14 | 29.06 |
PEG GAAP | N/A | 1.10 |
P/S | 7.01 | 2.91 |
P/B | 5.29 | 3,16 |
EV/sales | 6.32 | 2.94 |
Trailing EV/EBITDA | 97.64 | 16.05 |
Forward EV/EBITDA | N/A | 15.36 |
Source: Seeking Alpha
Granted, an argument can be made that these multiples are justified for a company that is expected to grow by over 20% in the coming years according to the most recent outlook. Unlike most semis, which reported declining sales and profits in 2023, PDFS managed to buck the trend by growing both during a downturn for the industry. Some may be willing to pay a significant premium for this kind of resilient growth.
Investor takeaways
PDFS has its strong points, and there is a case to be made in favor of long PDFS. Its ability to grow at a time when the industry contracted deserves mention. The forecast sees revenue growth in the low teens for FY2023, which is much better than the expected decline in the semiconductor market in the high single digits to the low teens.
This outperformance is not unusual for PDFS. For instance, PDFS grew at a CAGR of 20% in the last five years and the latest outlook sees this continuing by at least 20% on average per year, if not better. This partially explains why PDFS trades at a premium with multiples that are significantly higher than the median in the sector.
PDFS thus offers growth, but it will come at a price. However, while some may be willing to pay any price for growth, others are likely to be dissuaded by it. This may be part of the reason why the stock has actually underperformed, even though PDFS itself has outperformed. The stock may be too pricey for a bunch of people, which could explain why it has come under selling pressure.
While the stock still gained in the past year, it took a late rally to do it. However, this rally has stalled after encountering what appears to be resistance. It's not impossible for the stock to resume the recent slide in the stock, despite the recent rally. The rally may have been nothing more than a temporary bounce and the trend may still be down.
I am neutral on PDFS in light of the above. The late rally in the stock in 2023 may have led some to believe PDFS has ended the slide, but that may not necessarily be correct. The charts, for instance, suggest the path of least resistance is down with resistance looming near. Multiples are also such that a further decline in the stock may be warranted.
Bottom line, there are several reasons why the stock could be heading down. PDFS has a good track record when it comes to outperforming in terms of growth, but the stock may need to trade at lower levels before going long is worth considering. The stock has underperformed for some time. Chances are that will stay that way for a while longer.
For further details see:
PDF Solutions: The Rebound May Not Be Sustained