Axcelis Technologis - Is it a BUY opportunity?

I was looking for some stocks to buy and, maybe because I got lazy, I focused my attention on one of the first that popped out on my screener, Axcelis.

Axcelis is a US semiconductor equipment manufacturing company, they basically that’s been operating worldwide since the late 90’s.

By the time I’m writing this the stock trades at around $115 with a market cap sitting right below the $4B, so we can call it a ‘’small mid cap’’.

The stock lost about 40% since the last year all time high (about $192 per share, if you’re wondering), so, when I saw this, like all the value investor out there, I thought that I would became a billionaire in a couple years buying this stock, but stupidly, before buying it, I first had a look to the last SEC Filings and then, you now, I became a monster in the sheets. (just tryna be funny though).

This is gonna be a long run and I would never explicitly tell you to buy or not buy the stock, so if you are looking for fantastic financial advice, please stop reading.

Okay, let’s break the company down.

The first number we see in the income statement is actually the elephant in the room, the revenue. The company in the last quarter didn’t grow, at the end of the Q2 the company recorded a -6.5% in growth, looking at the company history, we can see that this isn’t unusual, but, getting deeper, we can see that, since the new CEO came in in 2013, the company had a CAGR of about 19%, they had about $200M in revenue in 2013 and they closed 2023 above $1B. It’s obviously easier to get this return when you’re small, but I still think that the numbers are discreetly good.

They were able to deliver this growth basically with no debt, right now they have about $40M in debt (all leases, anyway) and keeping a really good operating margin, about 25%.

So, in the last few years, even with some ups and downs, the company did well, but there are a few things that bother me. Let’s go step by step.

First of all, Axcelis, like all other semiconductor equipment manufacturing companies, gets most of all this revenue in Asia. about 70%, in this case, mostly in South Korea. Don’t get me wrong, I’m not a racist, but we gotta keep this in mind.?

Emerging markets are overall riskier than fully developed markets, as the U.S., so basically it? brings up the risk in the company that makes the cost of capital way more high than a U.S. company, we’re talking of about 14.5% of WACC, but, overall, it is roughly similar to the other company in this business. So, this is a thing that we might consider during the valuation because, even if we are investing in a U.S. company, we are also buying a bunch of risks that are not involved in the U.S. market.

Anyway, as I said, this is a situation that is similar to all this type of company, so if you really want to invest in this sector, we can expect this type of situation in every company.

Let’s go into the balance sheet.

The company has roughly $1B in equity with $145M in cash and $400M in short term investments. Is that a problem?

Company makes $1B in revenue, but how much capital is invested to provide this number?

We have to make a decision here, are the R&D expenses a capital expenditure? For me, they are. I mean, you spend money this year to improve your equipment, but you won’t get the money back the next year, it will probably take a while, how much? I don’t know to be honest, but I suppose 5 years. Making this I took the last 5 years R&D expenses and capitalized them. This changes either our balance sheet and our income statement, but it obviously takes down the ROIC.?

We now have a +$270M in assets in the balance sheets that we can call maybe “Research assets” and we also have a +$70M in amortization.?

So, capitalizing the R&D, the invested capital flies out to about $700M, instead of $430M that we have without this process. A huge difference, now the ROIC is 37%, instead of 53%.

At this point, the company for every dollar invested, gets back $1.6 in revenue.?

Good growth, good margin, the company is healthy, but is this sustainable in the future?

As I said, the company right now holds $550M in cash or similar, mostly US bonds. Just to give an idea, they spent about $450M in R&D from 2018 to 2023. I mean, it’s not a problem to have cash, I swear I dream at least once a week to have half a billion in bonds, but why, a supposedly growth company invest so much money outside the company??

Just for mentioning it, about 7% of the pretax income is provided by the interest income and obviously this helps the company to look more profitable than it actually is based on the operations.

So, did the company grow because it is efficient or because the whole semiconductor business boomed?

What I see now it’s a company kinda conservative that’s scared to make the big step, at least for the moment. They haven’t reinvested that much in the past few years and this might be a problem for the future growth. Just to give you an idea, they reinvested inside the company less than the ‘’big sharks’’ in the markets (like Applied Materials for example) did.?

That’s not a bad thing in absolute terms, you might see growth delivered with low reinvestment, that is wonderful for a company, but in a small company, like Axcelis, I’d like to see more effort to get a bigger market share.

Right now the company has roughly 1% of the market share (the whole sector is valued about $100B), can the company be able to grow more than the whole sector and get a better market share? Yeah, it is possible, but in my opinion, something has to change.

The fundamental expected growth, based on Reinvestment Rate and ROIC is about 10%, so pretty much in line with the forecasted growth for the entire sector.

I’m not confident to share with you a value for the stock, but I feel sure to say that the ‘’analyst price target’’ of $150 or more per share is kinda optimistic, based on my numbers, at this point in the timeline, this value is reasonable with an annual growth of +20% in the next years, basically the growth that they had the past 10 years.?

It is possible, but it is your choice to believe that is probable or not.

Forecasting the future growth with the expected growth rate based on the fundamentals, the company is priced by the market pretty close to its fair value.

As always, find a value for the stock is pretty hard, it all depends on what future you see for the company, they make ion implantation mostly used in South Korea by Samsung and I’m not a ion implantation expert, I do not know if their product can actually ‘’change the world’’, but if even I had this information I probably won’t make a public assumption, simply because I do not want to influence your analysis, if you gonna make one.?

Feel free to disagree with me, I am always open to share ideas.