Amkor Technology: more likes than dislikes

Amkor Technology (NASDAQ: AMKR) has been volatile recently. The stock is being weighed down by forces with opposing views.On the one hand, due to the weakening demand for semiconductors, especially Earnings outlooks for industry heavyweights have been downgraded recently. On the other hand, the stock benefited from low-value deals and strong guidance, as AMKR did a good job managing various headwinds, in part thanks to rising industry interest in advanced packaging. There are still reasons to be long AMKR. Why will be introduced next.

AMKR is rebounding

AMKR’s stock has fallen this year, similar to most companies. It’s worth mentioning, though, that AMKR did this better than most semifinals. For example, the iShares PHLX Semiconductor ETF (SOXX) is down 33% year-to-date. In comparison, AMKR has lost 24% year-to-date. In this sense, AMKR has outperformed.

Still, the stock has been very volatile lately. The stock fell about 25% in June, but eventually bounced back all in, before jumping nearly 50% in July. However, the stock has reversed course and is now trading lower again. The stock has fallen nearly 20% since early August. All of this happened over a period of about three months, as shown in the image below.

Stocks are rebounding, subject to changing headlines. For example, the stock suffered losses when China imposed a COVID-19 lockdown, which will come back to AMKR’s earnings report. The stock rebounded as restrictions were lifted, giving AMKR a chance to normalize business activity and improve quarterly results.

However, the stock’s recent decline coincided with weak forecasts from industry giants like Micron (MU) and Nvidia (NVDA). Both cited weakening chip demand as a reason for lowering their earnings outlook. A double whammy led to a semifinal sell-off, including AMKR.

It is believed that reduced demand for semiconductors will lead to reduced demand for OSAT services from companies such as AMKR. On the other hand, it’s worth pointing out that while this is indeed harder, individual names can still thrive in an environment of declining overall demand for semiconductors. After all, not all companies rely on OSAT services. Some companies rely on their own internal testing and product packaging.

For example, consumer demand shifting from fabless designers using OSAT services to products instead of relying on in-sourced IDMs could create more business opportunities for companies like AMKR. That’s where things like advanced encapsulation can come into play and come into play. AMKR can create added value to attract customers to convert to benefit from it. AMKR isn’t necessarily doomed if or when a downturn hits. It depends on how severe the conditions are, assuming they even get there in the first place.

AMKR’s earnings growth remains steady

Part of the reason AMKR hasn’t sold off like some of the other semiconductor names is because AMKR hasn’t reported a significant deterioration in its earnings outlook like the aforementioned semi. Instead, growth is expected to pick up. China’s lifting of restrictions and a return to normal output levels in the third quarter helped in this regard.

However, the second-quarter numbers did suffer from the Chinese lockdown. Revenue in the second quarter fell 5.8% sequentially, but increased 7% year over year to $1.505 billion, a new high for the second quarter. Note that AMKR missed revenue expectations, but this was due to AMKR’s later-than-expected resumption of production in China, resulting in lower-than-expected revenue.

The decline in profit margins was mainly due to lower utilization rates due to the closure of production facilities in China. Nonetheless, EPS was unchanged year-over-year at $0.51 due to the contribution from non-operating income. EBITDA in the second quarter of fiscal 2022 was $302 million, up from $295 million in the second quarter of fiscal 2021. AMKR ended with $1.1B in cash and short-term investments, offset by $1.1B in total debt. Debt to EBITDA is 0.8x. The table below shows the numbers for the second quarter of fiscal 2022.

(yawn)	Q2 FY22	Q1 FY22	Q2 FY21	chain ratio	year-on-year
just sell	$1.505 million	$1.597 million	$1.407 million	(5.76%)	6.97%
gross profit margin	16.6%	20.4%	19.4%	(380bps)	(280bps)
operating profit margin	9.5%	13.2%	11.0%	(370bps)	(150bps)
Operating income	$143 million	$210 million	$155 million	(31.90%)	(7.74%)
Net Income (attributable to AMKR)	$125 million	$171 million	$126 million	(26.10%)	(0.79%)
EPS	$0.51	$0.69	$0.51	(26.09%)	–
(Non-GAAP)
EBITDA	$302 million	$363 million	$295 million	(16.80%)	2.37%

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Source: AMKR Form 8-K

The figures for the second quarter were negatively impacted by the lockdown in China, but the outlook is expected to return to normal. Guidance calls for revenue of $188.0-$1.98 billion in the third quarter of fiscal 2022, up 14.8% year over year at the midpoint. The forecast calls for GAAP EPS of $0.82-$1.02, a midpoint increase of 24.3% year over year. Both represent new all-time highs at the midpoint.

(yawn)	Fiscal 2022 Third Quarter (Guidance)	Q3 FY 2021	year-on-year
income	$1,880-1,980 million	$1.681 million	11.84-17.79%
gross profit margin	19.0-21.0%	19.3%	(30bps)-170bps
net income	$200-250 million	$181 million	10.50-38.12%
EPS	$0.82-1.02	$0.74	10.81-37.84%

Click to enlarge

While AMKR acknowledged weak reports in some areas of the semiconductor market, demand remained healthy, thanks in large part to advanced packaging. From the second quarter earnings call:

“Demand for our technology and services remains strong due to our leadership in advanced packaging supporting 5G, automotive, high-performance computing and IoT. This is despite the microeconomic headwinds we observe in some areas and some weak market forecasts. , but we believe the long-term growth drivers for the semiconductor industry remain. We believe our strategic focus and leadership in key semiconductor markets will continue to drive future growth.”

A transcript of the second quarter fiscal 2022 earnings call can be found here.

AMKR is on sale

Another reason AMKR hasn’t sold off like other semis has to do with valuation. Unlike other companies whose valuations have skyrocketed, AMKR trades at a discount, both to the industry median and to its own 5-year average. For example, analysts currently expect earnings of $2.92-$3.10 per share in fiscal 2022 and $3.10-$3.30 per share in fiscal 2023. As a result, AMKR trades at 6 times forward earnings and trails 7 times earnings. AMKR is currently trading at a much lower price-to-earnings ratio than usual. The 5-year averages are 23 times and 15 times, respectively. In terms of industry medians, 21x and 22x, respectively. AMKR trades at a lower valuation than most semi-finished products.

	AMKR
market value	$4.70B
Corporation value	$4.98B
Income (“ttm”)	$6,507.3 million
EBITDA	$1,408.2 million
trailing price-earnings ratio	6.69
Forward P/E	6.27
PEG ratio	0.14
postscript	0.71
P/B ratio	1.44
Electric Vehicles/Sales	0.77
Trailing EV/EBITDA	3.54
Forward EV/EBITDA	3.27

Click to enlarge

Source: SeekingAlpha

Investor takeaway

Holding on to semiconductor stocks isn’t easy. Many semis remain strong, as is the industry as a whole, but there’s no denying that semis will underperform or even underperform other stocks in 2022. There have been some headwinds that have weighed on stocks, including semis. These include a weakening global economy, rising inflation and changes in monetary policy.

Semi-finished products were also negatively impacted by industry-specific headwinds. The semiconductor industry is still growing, but also slowing. Growth in 2022 will be lower than in 2021, and even lower in 2023. In addition, more and more companies are issuing weak forecasts.

For example, Samsung, which leads the world in monthly wafer starts, joins the ranks of companies predicting tough times for the semiconductor industry. All of these reports are dragging down other names in the industry, even if they do well on their own. AMKR falls into this category.

AMKR has yet to experience weaknesses that affect the other semis. Instead, AMKR is expected to report record revenue and earnings in its next quarterly report. AMKR could see business conditions worsen in the coming quarters, but there’s hardly any for now.

However, AMKR is trading like a stock destined to experience a deterioration in its top and bottom lines. The valuation of the AMKR transaction makes this clear. On the one hand, AMKR’s top and bottom lines are hitting new all-time highs, with no signs of an imminent recession. On the other hand, stocks trade like a downturn has arrived, which is why stocks trade at much lower price-to-earnings ratios than they usually do.

As mentioned in the previous article, I am bullish on AMKR. If anyone is looking for quick returns, a stock like AMKR probably isn’t it. The stock is likely to remain volatile as headwinds abound. The semiconductor market is likely to continue to slow due to various headwinds, including economic deterioration in many parts of the world. Bulls should brace for a short-term setback.

AMKR looks better in the long run. The semiconductor industry may experience a correction after a boom in recent years, but should continue to grow in the long run. From that perspective, it makes sense to pick stocks with an eye toward the future, especially if they can be sold at a discount. As one of the leading providers of OSAT services, AMKR is well-positioned to grow with the increasing popularity of advanced packaging in the industry.

The balance sheet is in good shape. Such a large multiple already reflects a sizable earnings slide, which could make AMKR a bargain if the slide doesn’t come as expected or isn’t as severe as expected. With the help of advanced packaging, AMKR still has a chance to outperform, especially if the recession isn’t as bad as feared. The bottom line is that if someone is involved in the long term, they like AMKR more than they don’t.