2023-10-11 07:01:29 ET
Summary
- A lowering of the outlook in the last report led to a big drop in the stock, but the stock has strengthened in recent weeks.
- Another earnings report is due next month, which could determine where the stock is heading next as it could answer a number of pressing questions about PDFS.
- PDFS has been able to grow at a time when others have not, but that growth may be at risk if the recent slump in demand PDFS alluded to continues.
- The last two reports triggered double-digit selloffs in the stock and with another report due soon, it may be time to head to the sidelines.
PDF Solutions (PDFS) is still up for the year, but the stock has lost most of the gains from earlier in the year after a major selloff in the last two months or so. PDFS had done very well earlier in the year, thanks in no small part to PDFS' ability to grow at a time when the semiconductor industry is not, but the most recent earnings report raised doubts about continued growth. PDFS actually reported strong YoY growth and it soundly beat estimates, but a lowering of the outlook led to a selloff in the stock. However, PDFS is showing signs the decline is over and it may be in the early stages of a resumption in the rally from earlier in the year, although it may need some catalyst to keep going. Why will be covered next.
PDFS may be going for a comeback
PDFS has gained 13.5% YTD with the stock closing at $32.36 on October 9, but that is down from the 68.4% gain it had as recently as July 11 when the stock reached a 52-weeks high of $48.02. Losses in the last two months have erased most of the 2023 gains, especially on August 9 when the stock lost 12.9% after PDFS released its most recent earnings report. The chart below shows how PDFS took a hit after doing much better earlier in the year.
However, the chart also shows how the worst may be behind with the stock rising for the last several weeks after a long decline. The stock declined by roughly a third off the most recent high to get as low as $30.80 on September 21 before it started to change direction. This may not be a coincidence. Keep in mind that prior to the selloff in the last few months, the stock was on the rise for over a year.
If the uptrend started with the June 2022 low of $19.34 and which ended with the July 2023 high of $48.02, then the 61.8% Fibonacci retracement level is at $30.30. This is $0.50 below the aforementioned $30.80, which suggests support was at least in part responsible for the recent strengthening in the stock. If PDFS has found support and assuming support continues to hold, PDFS may have found the foundation for a renewed march higher.
PDFS has gone against the flow in 2023
PDFS is off the highs, but that does not take away from the fact that the stock did not do all that bad for much of 2023, especially considering the state of the semiconductor industry. The market for semiconductors has contracted in 2023, which has caused sales and by extension profits to decline for most companies active in the space.
However, there are exceptions and PDFS is one of them. It's worth mentioning that PDFS has managed to grow at a time when most are not. For instance, in the most recent quarterly report, revenue increased by 20% YoY to $41.6M and non-GAAP EPS increased by 72.7% YoY to $0.19 as shown in the table below. The ability to grow at a time when most are not due to weak overall demand in the market should count for something.
(Unit: $1000, except for EPS, margins and shares) | |||||
(GAAP) | Q2 FY2023 | Q1 FY2023 | Q2 FY2022 | QoQ | YoY |
Revenue | 41,601 | 40,759 | 34,668 | 2.07% | 20.00% |
Gross margin | 70% | 71% | 65% | (100bps) | 500bps |
Net income (loss) | 6,835 | 355 | (1,147) | 1825.35% | - |
EPS | 0.17 | 0.01 | (0.03) | 1600.00% | - |
Weighted-average shares outstanding | 39,076K | 38,859K | 37,028K | 0.56% | 5.53% |
(Non-GAAP) | |||||
Revenue | 41,601 | 40,759 | 34,668 | 2.07% | 20.00% |
Gross margin | 74% | 75% | 69% | (100bps) | 500bps |
Net income | 7,496 | 7,270 | 4,292 | 3.11% | 74.65% |
EPS | 0.19 | 0.19 | 0.11 | - | 72.73% |
Weighted-average shares outstanding | 39,076K | 38,859K | 37,615K | 0.56% | 3.88% |
Source: PDFS Form 8-K
What could hinder a rally at PDFS
Still, a continuation in the recent strengthening of the stock is not guaranteed, nor a resumption in the rally from earlier in the year. There are several reasons why some may refrain from taking a shot at PDFS. For starters, multiples for PDFS are on the high side. PDFS trades at 47 times forward non-GAAP earnings with a trailing P/E of 42. Such multiples may be too much to swallow. Remember, these multiples are for a stock whose price has been slashed by roughly a third. The table below shows some of the more commonly used multiples for PDFS.
PDFS | Sector median | |
Market cap | $1.24B | - |
Enterprise value | $1.12B | - |
Revenue ("ttm") | $162.7M | - |
EBITDA | $12.5M | - |
Trailing non-GAAP P/E | 42.21 | 18.48 |
Forward non-GAAP P/E | 47.27 | 21.77 |
Trailing GAAP P/E | 139.56 | 24.71 |
Forward GAAP P/E | 154.76 | 24.96 |
PEG GAAP | N/A | 0.78 |
P/S | 7.50 | 2.61 |
P/B | 5.49 | 2.78 |
EV/sales | 6.89 | 2.56 |
Trailing EV/EBITDA | 89.56 | 14.01 |
Forward EV/EBITDA | N/A | 13.63 |
Source: Seeking Alpha
In addition, an argument can be made that PDFS is trading above fair value. Granted, fair value is a highly subjective term and there are several methods used to calculate fair value. Still, PDFS grew non-GAAP EPS from $0.39 in FY2017 to $0.60 in FY2022, a CAGR of a relatively modest 9%. However, earnings growth is expected to be faster in the next 5 years and assuming earnings grow at 20% on average per year and with TTM EPS of $0.87, then it can be argued that fair value is around $17.40.
Why PDFS disappointed and why it may happen again
It's also worth mentioning that PDFS sold off after the last two earnings reports, which means it could happen again with PDFS scheduled to report again in November. Remember how PDFS handily beat estimates for the top and the bottom line at the last earnings report, but this was more than offset by a lowering of the outlook by PDFS.
The FY2023 outlook had called for revenue to grow in the mid-teens in 2023, but this was lowered to the low-teens. PDFS cited several reasons for why growth is headed for a slowdown. From the Q2 FY2023 earnings call:
"Now, let me turn to discuss our view of the environment and our perspective of the second half of the year. Midway into 2023, we are more cautious in our short term view. Our game share customers in China are reporting decreased wafer volumes, which will reduce game share in the second half of the year.
We anticipate continued increases in Cimetrix runtime licenses, but a lower rate of improvement than we initially anticipated, as equipment suppliers, particularly outside of China, remain conservative on the increase in equipment shipments.
Finally, for Exensio, in Q2, we saw customers delay some expected bookings to the second half of the year. Although some of those bookings already closed in July, we remain cautious about the timing of others.
Early this year, we anticipated revenue growth for the year approaching mid-teens. Our expectation now is year-over-year growth will be in the low double-digit percentage. The cloud analytics growth is expected to exceed the overall growth, but it will be offset partially by year-over-year decline in integrated yield ramp."
A transcript of the Q2 FY2023 earnings call can be found here .
The upcoming report could be a catalyst again
Earnings estimates have been revised to account for the lowering of the outlook. The consensus is that PDFS will post non-GAAP EPS of $0.15 on revenue of $41.2M in the upcoming report, down $0.04 QoQ and $0.05 YoY. For the whole year PDFS is expected to earn $0.69 on revenue of $166M in FY2023, which is $0.10 more than FY2022. Still, it implies earnings of $0.31 in H2 after earning $0.38 in H1. In other words, a slowdown is underway.
The upcoming report could be the catalyst that determines whether the stock continues to rebound or whether it resumes the recent slide. The next report needs to show the last report was a fluke and that growth remains. On the other hand, if it turns out the demand environment has weakened further, then the stock may be due for another leg down.
Investor takeaways
I am neutral on PDFS. The stock seems to be recovering from the recent slide and this could continue, but there are no guarantees it will. The stock seems to have found support and the market may be betting on PDFS having good things to report on in its next report, but the market could get the opposite of what it is looking for.
The stock has sold off the last two times after PDFS reported, so a third time should not be ruled out. While recent growth is rather impressive, especially considering the less than favorable circumstances with the industry in a slump, multiples are on the high side for PDFS. Earnings growth has been better recently, but that does not change the fact that earnings growth over the long term has not been all that high, being in the high single digits.
It's true the stock has declined by a third, compared to the most recent high and some may be on the lookout for stocks that have fallen down to bet on a rebound. However, the recent discount in the stock comes after a long rally that saw the stock more than double in value. The stock is no bargain and the recent drop in the price of the stock was arguably much needed as multiples were headed to the stratosphere.
The upcoming report could be a catalyst, just like the previous ones have been. PDFS might beat estimates once again, as it did in the most recent one, but the market will be looking for further updates as to whether PDFS is seeing a further deterioration in demand, as alluded to in the last report, or whether it has seen an improvement in business conditions.
The outlook could determine whether the stock continues its recent attempts to get back on track or whether it resumes the slide of the past few months. The market seems to believe the current slowdown will pass soon enough, which is why the stock has not fallen by more than it did. Next year is expected to be a year of growth for the industry, and PDFS by extension, but these expectations may have to be revised if the recent signs of a slump in demand do not improve and instead turn out to be the start of things to come. The stock may not yet have hit bottom.
Bottom line, each earnings report this year has been followed by volatility and the last one for the year looks to be destined for the same fate. While some may be willing to gamble on the next report coming in better than expected, this could backfire if the stock sells off, as it did after the last two reports. The more prudent move may be to wait a while until the next report is here before deciding on the next move.
For further details see:
PDF Solutions: Upcoming Report Could Be The Catalyst Once Again