Amkor Technology: On Hold For A While (NASDAQ:AMKR)

Amkor Technology (NASDAQ:AMKR), a provider of outsourced semiconductor assembly and test services, or OSAT services, to the semiconductor industry, has released its Q1 FY2024 report. AMKR soundly beat consensus earnings estimates, in addition to calling for the trough in the downward cycle that has adversely impacted AMKR in recent quarters. The stock jumped higher at first, but AMKR gave most of it back before the end of the day. The stock has since gone essentially unchanged, continuing the sideways action that has been in place for months. Why will be covered next.

Amkor rallied, but the stock has stalled

A previous article from October 2023 concluded AMKR had what it took for a stock to be worth holding on to by shareholders for several reasons. For instance, AMKR was available at multiples that were well below that of others in the sector. EV/EBITDA, for example, was slightly below 5x, below the median of 13x. Furthermore, at least one methodology used to calculate a stock’s fair value suggested AMKR was trading well below fair value. All this argued in favor of continuing to bet on AMKR.

Accordingly, AMKR was rated a hold for shareholders and holding on has been worth it in hindsight. The chart above shows how the stock soared higher in the two months following October. The stock hit a low of $17.58 on October 31, only for the stock to rally and hit a high of $34.44 on December 26. AMKR thus came close to doubling its market cap in the span of two months or so.

Why Amkor may be up against resistance

However, what the chart also shows is that the stock has not made much progress since then. The stock has essentially gone sideways five months into 2024. In fact, the stock has gone flat like a pancake in recent days. AMKR is actually down 1.9% YTD after the stock closed at $32.63 on May 9, 2024. Notice also how the stock seems to be having problems staying above $34 or so for too long.

The stock made it past $34 on several occasions, but not for long because each foray past $34 did not last more than a couple of days before the stock fell back below $34. The longest AMKR was able to hold on was from March 6 to March 8, but the end result was no different from prior failed attempts to break through in December and January.

The latest unsuccessful attempt happened on April 29 when AMKR got as high as $35.95, only to fall back and end the day at $32.35. The stock has not done much this year, but it’s worth mentioning that AMKR has delivered if one looks further into the distance beyond the trees. The stock bottomed at $5.40 in March 2020 and AMKR has gradually moved higher over the years with admittedly some pullbacks along the way. In other words, the existing trend for the last four years points to higher stock prices, although it may require patience.

Still, there is no ignoring the lack of progress lately. Especially since there may be a reason why sellers seem to get triggered at $34 or so. According to at least one methodology used to calculate fair value, AMKR may be considered overvalued past $34. Recall how GAAP EPS increased from $0.53 in FY2018 to $1.46 in FY2023, which means AMKR grew earnings at a CAGR of 22.47% in the past five years.

If we then assume AMKR continues to grow EPS by 22.47%, on average, a year, and AMKR has earned $1.51 in the last 12 months, then fair value for AMKR is $33.93, close to $34. This could explain why AMKR is facing resistance at $34 or so, even if fair value is a subjective term. Much higher and the stock could be considered overvalued according to the methodology favored by Peter Lynch.

Why the market may have had second thoughts about the Q1 FY2024 report from Amkor

As mentioned before, the stock made its latest attempt to break out on April 29. The stock did not jump higher for no reason on that day because it happened in the wake of the release of the latest report from AMKR. The consensus expected AMKR to announce GAAP EPS of $0.11, but AMKR reported $0.24, $0.13 more than expected, on revenue of $1,366M. Note that AMKR revised the depreciable life of some equipment upwards, which added $0.05 to EPS in the latest report.

EBITDA was $233M, down 28.5% QoQ and up 1.8% YoY. Keep in mind AMKR tends to experience a decline in the first quarter after the fourth and holiday quarter due to seasonality. AMKR finished the quarter with $1,038.3M of long-term debt and another $113M worth of short-term borrowings and the current portion of long-term debt, which was more than offset by cash, cash equivalents and short-term investments of $1,572.7M on the balance sheet. The table below shows the numbers for Q1 FY2024.

Click to enlarge

Source: AMKR Form 8-K

What may have triggered second thoughts about Amkor

Guidance calls for Q2 FY2024 revenue of $1.4-1.5B and GAAP EPS of $0.14-0.30 as shown below.

Click to enlarge

Source: AMKR Form 8-K

The latest guidance was soft, but AMKR is still sticking with its prior outlook for FY2024. AMKR is still expecting a strong rebound in the second half of the year. However, while the stock jumped initially after the big earnings beat, it came down and the earnings call may have played a role.

AMKR acknowledged weaker-than-expected demand in some areas, but it believes strength in other areas can make up for it. From the Q1 FY2024 earnings call:

“Now let me turn to our second quarter outlook. After a multi quarter semiconductor industry cycle, we believe the first quarter marked the low point of our revenue. We expect second quarter revenue of $1.45 billion, which represents sequential growth of 6% and flat revenue year-on-year. Overall, our expectations for full year 2024 have not changed. We foresee a muted first half followed by strong growth in the second half, driven by the seasonal launch of premium tier smartphones, a meaningful ramp of a new consumer wearable program and additional capacity coming online for 2.5D technology.

Assumptions for more balanced inventory levels within android, memory and PCs had additional confidence. Although the automotive and industrial market appears to be softening more than we expected earlier this year, we see upsides in other areas of our portfolio.”

Source: AMKR earnings transcript

Using these guidelines, and assuming H1 EPS of $0.46, then based on seasonal patterns and a stronger H2 than H1, FY2024 EPS is estimates to end up at around $1.65. In comparison, AMKR earned $1.02 in H2 FY2023 after earning $0.44 in H1 for a total of $1.46 in FY2023. This translates to a P/E ratio of 19.7x with a stock price of $32.63. In comparison, the median in the sector is 30x.

Could Amkor disappoint?

Nevertheless, the reports of greater-than-expected weakness in markets like automotive deserve attention. Keep in mind AMKR is a leader in the OSAT market when it comes to automotive, so the recent developments in the automotive market, and the electrical vehicle or EV market in particular, are a headwind because less demand for EVs will affect AMKR.

To counter this, AMKR seems to be banking on other markets, the mobile market in particular. A number of OEMs have suggested they intend to incorporate AI functionality into their smartphones, which could provide additional business for AMKR, on top of triggering a replacement cycle as users replace their old smartphones with AI-enhanced ones.

Apple (AAPL) is one of the OEM’s interested in bringing AI to the smartphone. This is potentially huge for AMKR since AAPL is its biggest customer. According to the 2023 annual report, AAPL brought in 27.7% of revenue in FY2023. However, it’s worth mentioning that AAPL has seen sales come under pressure with, for instance, iPhone sales down 10% YoY in its most recent report.

There is reason to believe this weakness could have legs to it. For instance, Huawei was virtually absent from the high-end of the smartphone market in recent years, where AAPL competes, due to the inability to source U.S. semiconductors as a result of restrictions imposed by the U.S. government. This allowed AAPL to fill the hole in the market left by Huawei.

However, Huawei has returned to releasing high-end smartphones since late last year, which could affect AAPL if Huawei manages to regain the market share it lost in the years following its inclusion in the U.S. Entity List in 2019. If AAPL loses sales due to Huawei or some other reason, AMKR stands to be affected as well.

Investor takeaways

AMKR has seen its stock do well in recent years, but not so much in 2024. The stock has gone pretty much flat, especially in recent days. It appears the stock is up against resistance if the charts are any indication, which has kept a lid on AMKR since late December. There have been multiple attempts to break through resistance at $34 or so, but all attempts have been unsuccessful.

While AMKR is optimistic Q1 represents the trough, AMKR is still dealing with soft demand that has adversely affected recent quarterly results. In fact, some market segments seem to be regressing, contrary to expectations, a sign it may be too early to call an end to the downturn in the semiconductor market.

AMKR believes it can make up for the unexpected weakness in other markets, mobile in particular, but that is not a sure thing. AAPL, its number one customer, is dealing with soft demand, which could get worse if Huawei gains in the market for flagship smartphones. Huawei used to be one of the biggest OEMs for smartphones and its absence helped AAPL and AMKR by extension, which suggests its return could have the opposite effect on AMKR. So there is some uncertainty clouding the outlook for AMKR.

With that said, it’s important to note that AMKR, and its stock, have done well in the last four years. EPS has grown as a CAGR of 20+% in the past five years, and the stock has multiplied in value during this time. AMKR has a strong position in the market for advanced packaging, which has good growth prospects in the long run. Long AMKR may not do much in the short term, but it could be different in the long term.

Accordingly, I continue to hold shares of AMKR bought in the past, but I would also not be a buyer of AMKR for now. In fact, some may want to trim their holdings, assuming they have not already done so after the rally in late 2023 in order to lock in profits after the stock doubled in price. The stock may be close to fairly valued according to some measures and resistance seems to be in the way, so the stock may not offer much of a return in the short term. The stock has underperformed all year and this could continue.

Bottom line, the fact that the stock has gone sideways says a lot. There is not much reason to put new money to work because of the likelihood the stock won’t make much progress for the time being. Whether it is the sideways action in the stock, being fairly valued, being close to resistance or the uncertain state of demand with the possibility of a further deterioration in demand, there are several reasons to be staying on hold.