Axcelis: A Canslim Analysis

Legendary growth stock advocate William J. O'Neil developed a famous framework for finding stocks likely to appreciate by several hundred percent. He dubbed his method the easy-to-remember acronym "CANSLIM" (aka CAN SLIM and canslim). Canslim indicates various desirable attributes to look for in growth stocks. Axcelis Technologies, Inc. (NASDAQ:ACLS) in my view passes the canslim test and is suitable for investment anywhere at the current price of ~$120/share.

Background

Axcelis designs, manufactures, and services ion implantation equipment used in the fabrication of semiconductor chips in the U.S., EU, and Asia. The firm sells implanters for a variety of energy and current specifications and provides aftermarket support such as used tools, spare parts, equipment upgrades, maintenance, and training.

In its most recent investor presentation, Axcelis Technologies, Inc. lists three fundamentals supporting continued growth. These factors are the electrification of the automotive industry, the emergence of the Internet of Things ("IoT"), and geographical fab expansions driven by de-globalization and government incentives. The emergence of the electronic vehicle ("EV") and the Internet of Things are driving total addressable market ("TAM") expansion for the Purion power device and image sensor series, which are some of Axcelis' highest margin tools. Axcelis' main competitor is Applied Materials, Inc. (AMAT), which is a ~$100B diversified semiconductor company not solely focused on ion implantation. Let's review the company through the "CANSLIM" lens.

C. Current Big or Accelerating Quarterly Earnings and Sales per Share

The "C" in canslim stands for current quarterly results. Bill O'Neil wanted to see, "a major percentage increase in current quarterly earnings per share (the most recent reported quarter) when compared to the prior year's same quarter." O'Neil himself highlighted Priceline stock, which at that time had earnings increases of 34%, 53%, 107%, then 126% while its stock price climbed from $30 to $140.

Axcelis' has reported growth rates of 154%, 140%, 49%, and 64% over the last four quarters. Furthermore, Bill insists on sales growth of at least 25% for the latest quarter. On 2/8/23, Axcelis reported Q4 revenue of $266.1M, a 29.4% YoY growth rate. It's important to note that the company's backlog of undelivered orders and deferred revenue is growing, not shrinking, meaning bookings are strong. Specifically, over the last eight quarters the backlog has grown from $186.5M to greater than $1.1B. This backlog expansion will support future earnings growth. Axcelis gets a thumbs up for the "C" criteria of canslim.

A. Annual Earnings Increases: Look for Big Growth

The "A" in canslim stands for annual results. Bill recommends selecting stocks with 25% to 50% and higher annual earnings growth rates. The last three years of Axcelis' annual earnings growth rates are 90% in 2022, 97% in 2021, and 192% in 2020. Bill also notes that investors should look for a high return on equity. His studies show that nearly all the greatest growth stocks of the past 50 years had ROEs of at least 17%. Axcelis sports an ROE of 30%.

Bill makes a secondary point about the misuse of P/E ratios. He states:

"From 1953 to 1985, the average P/E for the best-performing stocks at their early emerging stage was 20. From 1990-1995 the real leaders began with an average P/E of 36 that expanded into the 80s. Beginning P/Es for most big winners ranged from 25 to 50, and the P/E expansions varied from 60 to 115."

Axcelis' ttm P/E ratio is 23, hardly worrisome for a growth stock. Axcelis gets a thumbs up for the "A" criteria of Canslim.

N. Newer Companies, New Products, New Management

The "N" in canslim stands for new companies, products, and/or management. Axcelis is not a new company, having been public for 23 years, but there is significant change going on under the surface. The market regards Axcelis as a cyclical stock tied to memory cycles, but the company is truly focused on mature process technology and is likely to continue to grow through the 2023 industry downturn.

Importantly, the power device market is showing gangbusters growth due to the electronification of the automobile. Axcelis expects over 55% of systems revenue in 2023 to be from power devices, with greater than 50% of that 55% coming from silicon carbide (as opposed to just silicon) applications. In the Q4 2022 earnings call, management estimated that Silicon Carbide wafer starts will double every three years driven by the automotive market. Management also called Axcelis:

"the only ion implant company that can deliver complete recipe coverage for all power device applications… Axcelis is considered by power device customers to be the technology leader of choice, providing the best product family and manufacturing capabilities."

In the Q4 2022 earnings call, Axcelis unveiled a model PnL that could be achieved as soon as 2024. Needham analyst Quinn Bolton estimated that if successfully achieved, the company would generate almost $9 in EPS. Axcelis gets a thumbs up for the "N" criteria of canslim due to the new secular growth in SiC implant driven by image sensors and the power device market.

S. Supply and Demand: Big Volume Demand at Key Points

The fewer shares outstanding and the smaller a company's market cap, the less buying power it takes to make the price per share appreciate. Since 2018, Axcelis has hovered around 34M shares outstanding and sports a current market cap of $4B. Over the course of 2022, the company repurchased $57.5M of shares, bringing capital returned to shareholders to over $132M since 2019. If the company decides to allocate capital to repurchases more aggressively, the shares outstanding could shrink significantly over the coming years.

The only factor to note is that management has made clear they are evaluating M&A opportunities outside of the implant market, and if they decide to pursue a target that costs above ~$400M, they might issue shares to fund the transaction. Axcelis gets a thumbs up for the "S" criteria of canslim.

L. Leader or Laggard: Which is Your Stock?

O'Neil's research indicates that you should buy among the best two or three stocks in a group. He indicates you should calculate this by looking at the RSI. As of 2/20/23 Investor's Business Daily, the company O'Neil founded, rates ACLS number two in the semiconductor equipment group. IBD also awards Axcelis a relative strength rating of 98. To put this in perspective, O'Neil found from 1950 to 2008 the average RSI of big winners before they began their major run-up was 87. Axcelis gets a thumbs up for the "L" criteria of canslim.

I and M: Not Valuable

The I and M in canslim stand for institutional sponsorship and market direction. These are minor concerns that are either not valuable or not determinable.

Conclusion

Axcelis Technologies, Inc. is the best-in-breed growth stock trading at a reasonable multiple. The earnings growth has been stellar over the last few years and should continue as several factors accelerate the growth of the implant TAM. There are no clear competitors in sight, and the company trades at a reasonable multiple while it continues to grow through the expected 2023 memory downturn.

Axcelis meets Bill O'Neil's standards when viewed through his canslim lens. Axcelis Technologies, Inc. is a growth stock investors should buy at the current price of ~$120/share.