Amkor Technology: Still Worth Holding On To

Amkor Technology (NASDAQ:AMKR), a provider of outsourced semiconductor assembly and test services, or OSAT services, to the semiconductor industry, has gone up and down all year. The latest twist saw the stock fall into negative territory for the year after a prominent shareholder decided to put up for sale a large block of shares. The stock’s performance all year leaves something to be desired, but it is worth noting how the company itself has outperformed at a time when the industry is in a downturn. Why will be covered next.

AMKR continues to go sideways

A previous article from early June rated AMKR a hold after concluding that the stock was likely to trade sideways, which argued against being a buyer of the stock. The chart below shows how this conclusion was justified with the stock closing at $22.12 on October 20, below the stock price of $25.12 on June 5 when the article was written.

To be fair, while the stock is now below where it was in early June, it did manage to trade higher initially. However, the stock was unable to keep going and began to falter, especially on September 7 when the stock lost 16.3% after news broke the Kim family, which owns a majority stake in AMKR, had put up for sale 10 million shares of AMKR with an option for more. The ensuing selloff wiped out all gains for the year and the stock is now down 7.8% YTD.

The stock got as low as $21.73 on September 12 during the selloff, but the stock seems to have regained its footing since then. This may not have been a coincidence. The sideways action in 2023 came after a strong rally from mid-2022 to early 2023, which saw the stock double in value. The 61.8% Fibonacci retracement of the uptrend, starting with the July 2022 low of $14.89 and ending with the February 2023 high of $31.38, is $21.95. This could help explain why the stock bounced in recent weeks as the stock is close to a potential support level, which might have convinced some to step in after the recent selloff.

Notice how in the chart the highs are heading down and the lows are heading up. If the highs and the lows are connected by trendlines, then the upper and the lower trendline are converging. While this has ways to go before the trendlines intersect, it points to the stock consolidating its gains from the preceding rally. This suggests continued sideways action in the stock, assuming of course the trendlines remain as they are.

Why the outlook matters

Still, the stock is on the cusp of moving past the lower trendline. It’s thus worth mentioning that AMKR is set to release its Q3 report on October 30, which has the potential to change the course of what has been sideways action. Keep in mind the Q3 report tends to show stronger results than the preceding quarters due to seasonality in the second half of the year. The second half of the year, for instance, sees the release of flagship smartphone models in time for the holiday season. AMKR benefits from this.

The second half of the fiscal tends to see much stronger earnings than the first half and this pattern is expected again. However, there tends to be large drop after the holidays and investors will be looking for any clues in the upcoming earnings report and conference call as to what to expect after the holiday bump is in the rear view.

While stakeholders, including the majority one like the Kim family, have the right to sell shares as they see fit, the fact that 10M shares were put up for sale recently is adding to the suspense of the upcoming report. Whether justified or not, some may see the decision to sell as justification for added trepidation with the Q3 report due. The market will be keeping a close eye on whether the report contains anything of relevance that could serve as justification for the selling of a large number of shares.

Note that expectations are rather elevated, even if AMKR is going up against a high base in Q3 FY2022, which saw record results. The consensus estimate is that the Q3 report will announce GAAP EPS of $0.53 on revenue of $1.8B, numbers that lean towards the high end of guidance from AMKR. The table below shows guidance from AMKR for Q3 FY2023.

Source: AMKR Form 8-K

The expected numbers represent a steep drop YoY, but they also represent a big improvement QoQ. Q3 EPS of $0.53 would be more than double the $0.26 earned in Q2. The table below shows some of the numbers in the preceding quarters.

Source: AMKR Form 8-K

The sequential improvement is likely to last into Q4, if past seasonal patterns are any indication, but what happens afterwards remains to be seen. Historically, seasonality turns against AMKR after Q4. In Q1 FY2023, for instance, revenue declined by 22.8% QoQ and EPS declined by 73.1% QoQ. The industry is still dealing with a decline in semiconductor demand and the market will be curious to know if AMKR believes the worst has passed or whether the downturn has ways to go. If AMKR gives out any clues at the upcoming report, that could go a long way towards determining the type of reaction the upcoming report will receive.

Why long AMKR is worth considering

Long AMKR has not done much in terms of returns in 2023, but there are still several reasons why it is worth considering, especially with an eye towards the long term. For instance, the balance sheet at AMKR is in good shape since AMKR is essentially debt free with $1.2B of cash, cash equivalents and short-term investments negating $1.1B of total debt.

In addition, AMKR looks inexpensive if one were to base this on multiples commonly used to evaluate stocks. For instance, EV/EBITDA is in the single digits at 4.79 on a forward basis and 4.23 on a trailing basis. In comparison, the median in the sector are 13.24 and 13.59 respectively. The table below some of the more commonly used multiples for AMKR.

Source: Seeking Alpha

Furthermore, an argument can be made that AMKR is trading below fair value. Granted, fair value is highly subjective. Nevertheless, GAAP EPS grew from $1.09 in FY2017 to $3.11 in FY2022, which translates to a CAGR of 23.33%. At the same time, the last five years were an exceptional period of expansion for the semiconductor industry, which suggests earnings growth is likely to be less in the next five years.

If we then estimate earnings growth at 10 percentage points less or 13.33% per year on average in the next five years and with TTM EPS of $2.35, then an argument can be made that fair value is around $31-31.50, well above the current stock price in the low twenties. It could also be why the stock has peaked in the low thirties all year or why the 52-weeks high is $31.38. Much higher and the stock could be way above fair value.

Why AMKR could outperform in the coming years

The semiconductor industry has long sought to shrink the size of transistors as it offered numerous benefits like, for example, power savings. However, the transition towards more advanced process nodes required to manufacture these smaller transistors is becoming increasingly difficult and costly. In addition, the improvements derived from these process nodes at the leading edge are becoming less.

So, on the one hand, the cost is going up and, on the other hand, the benefit is going down. Many have therefore argued that the pursuit of smaller and smaller transistors is leading the industry towards a dead end. It has been argued the industry needs to focus on alternative approaches that can result in improved performance in semiconductors other than merely shrinking the size of transistors.

This is where advanced packaging comes. There are many different implementations that fall under advanced packaging, but the improvements include higher yield, lower cost and improved performance. Advanced packaging can be done by the IDM, but also the OSAT provider. The packaging of semiconductors has long been seen as somewhat of an afterthought, especially as it tends to be a lower-margin business, but with advanced packaging OSAT providers have an opportunity to play a greater role, which could boost the top and the bottom line.

This is how a company like AMKR could outperform even when conditions are less than ideal in the industry. From the Q2 earnings call:

“We have a leadership position in advanced packaging throughout premium tier smartphones and we expect semiconductor content to continue to increase to support new features and functionality. This, combined with our continued investments in technology, in close cooperation with key customers, positions us well to outperform the market and to accelerate when the industry exits the current cycle.”

A transcript of the Q2 FY2023 earnings call can be found here.

The semiconductor industry is expected to return to growth

The quarterly numbers from H1 and Q3 guidance shows that AMKR is on track to outperform the semiconductor market, which is projected to decline in the mid-teens in 2023, worse than AMKR's projected decline in the mid-to-high single digits. In addition, the semiconductor market is widely expected to return to growth in 2024. According to WSTS, the semiconductor market is forecast to grow by 11.8% YoY in 2024.

True, forecasts are subject to revisions and semiconductor demand may not be as strong as expected in 2024. Still, if the market does return to growth in 2024, AMKR may be worth buying considering it comes with a number of strengths, including low valuations and a healthy balance sheet. The stock is consolidating, but if it were to come out of it, and assuming the market grows as predicted, it is likely to the upside.

Investor takeaways

I continue to hold AMKR, but I would not be a buyer of AMKR at this time. AMKR has a number of attributes that should please the investor, especially those looking for value. While AMKR has felt the impact of the industry downturn, AMKR has a solid track record of growing earnings over the long term, a healthy balance sheet and multiples are low.

However, the short-term picture looks more iffy. There is a reason after all why the stock has gone sideways all year. The industry is in a downturn and the outlook is clouded by uncertainty. While the general expectation is that the downturn will flip into an upturn in 2024, the semiconductor market has been weaker than expected. Inventories have not come down as fast as expected as end market demand has been weaker than expected, something that AMKR has acknowledged.

AMKR is scheduled to release its next update on the state of the industry on October 30. Expectations are on the high side if consensus estimates are any indication, which may prove warranted, but which raises the odds the market may be disappointed when the actual report is released. Some caution is warranted with the Q3 report due soon.

Bottom line, staying neutral has proven to be right move all year as the stock has essentially gone sideways in 2023. Those who are in it for the long term may consider buying with the stock price where it is, especially if the market returns to growth next year. Just do not be surprised if there are no returns on the investment for some time.