From $3.00 on 29 March 2023, AEM share price (SGX: AWX) rocketed 10% to hit $3.30 in recent days. Given the global economic slowdown and continuing downturn in the semiconductor industry, what could have propelled AEM share price (SGX: AWX)?
The revival of AEM share price (SGX: AWX) should be due to the recent good news from its most important client – Intel, which provided its business update on 30 March 2023. After four delays over two years, Intel finally launches its much-anticipated 4th generation Xeon processors, Sapphire Rapids for both laptops and servers. According to Intel, this is the highest quality data center CPU the company has ever delivered, and the ramp is continuing aggressively.
But what made the recent Intel’s announcement so special for AEM share price (SGX: AWX) was the series of upcoming product launches by Intel. Following Sapphire Rapids, hot on the heels will be the launch of Intel’s 5th generation Xeon processors, Emerald Rapids in 4th quarter 2023.
And that’s not all, Sierra Forest and Granite Rapids will be released by Intel in 2024. The series of product launches showed that Intel is determined to regain its market share in the data center CPU segment. Assuming that AEM continued to be the sole supplier of Intel for its backend System Level Test (SLT) of high-performance chips, the return of Intel should bode well for AEM share price (SGX: AWX) in the coming months. This is because the volume ramp for these new Intel chips should take place in the next few quarters.
The year 2022 proved to be a disaster for AEM share price (SGX: AWX) as the counter collapsed from $4.80 in January 2022 to a low of $3.10 in October 2022. The plunge in AEM share price (SGX: AWX) was largely attributed to troubles at Intel. In October 2022, AEM share price (SGX: AWX) had suffered a devastating meltdown of 25% within two weeks following reports that Intel is going to lay off workers amid steep decline for its core businesses – PC and Data Center.
In this blog, I have always maintained that on its day, AEM share price (SGX: AWX) can be unbeatable. Conversely, when the tide goes against AEM share price, the counter can spiral out of control. In view of this, this counter is really not for the faint-hearted.
Previously, I also wrote that I was 200% convinced that AEM share price would rise from the ashes to hit another new high. Given the current slump in the semiconductor industry, will AEM share price recover in 2023? In this article, I will share my view on the outlook for AEM share price (SGX: AWX) in 2023.Note that this is an opinion article and not meant to be a financial advice. Please do your due diligence or engage financial advisors before investing in the stock market. I am vested in this counter, so my views on AEM share price (SGX: AWX) may be biased.
AEM share price (SGX: AWX) bottomed
In the blink of an eye, the first quarter of 2023 has come to an end and we are looking at the release of the first quarter financial result again. All eyes are now on the business update as investors must be wondering if AEM could spring a surprise on the upside. Based on SGX filings, it seems that the big boys are betting on the recovery of AEM share price (SGX: AWX).
For two consecutive weeks, AEM made it to the Top Ten Institutional Net Buy Lists – 27 March ($7.7 million) and 3 April ($5.9 million). The buying interests from the institutional fund houses could indicate that AEM share price may have bottomed. But even so, it remains a big question if AEM share price could recover to the stratospheric height of $5.22 recorded in December 2021.
Assuming that the volume ramp from Intel managed to cause full-year revenue to reach $800 million and based on net profit margin of 16%, the projected net profit may be $128 million. On this basis, the EPS should be about $0.4144. If we use PE ratio of 9, then the target price for AEM could be about $3.70.
Currently, the P/E ratio for AEM is about 8.18. This is due to the fact that the overall semiconductor industry is suffering a cyclical downturn. Intel CEO revealed that its customers had too many chips and needed to work through their inventories. Looking at data extracted from Semiconductor Industry Association, global semiconductor industry sales were US$39.7 billion during the month of February 2023, a decrease of 20.7% less than February 2022. Based on the historical trend, the current semiconductor slump should till the third or fourth quarter of FY2023.
Diversification is key
The thing about AEM is that as a growth stock, investors will always be forward-looking, and most of them tend to place a premium on its growth potential. This means that AEM share price will often price in contract wins and sales orders from existing key customer, which is Intel.
The heavy reliance of AEM on Intel for revenue has been well-documented for many years. To be fair to the management, the Group did manage to reduce its revenue from Intel to around 60% (based on DBS’s report on 28 October 2022). Previously, Intel used to account for as high as 90% of AEM’s total revenue due to the sale of the massively successful High Density Modular Test (HDMT) equipment. Despite the effort to diversify revenue sources, the dependence on Intel for revenue is still too high. This results in customer concentration risk – troubles at Intel would impact AEM directly.
Of more encouraging is that AEM’s Test 2.0 vision is gaining adoption traction among its semiconductor clients as its three new customer wins will see volume ramps from early 2024. To improve chip performance, the semiconductor industry is moving towards using chiplets as a new advanced packaging. In fact, the next generation of artificial intelligence chips will not be possible without such advanced packaging. Thus, the volume ramps from the three customers actually validated AEM’s Test 2.0 vision.
Furthermore, it is uncertain that Intel can achieve a turnaround in 2023 or 2024, so the new customer wins would go a long way in offsetting the heavy reliance on Intel.
Another catalyst would be the capture of the remaining 10 out of 20 semiconductor companies as customers. The patents obtained in 2022 may be pivotal in the Group’s long-time quest to secure new customers and diversify its revenue source.
AEM’s next game-changer
The consumable business may be the next trump card for AEM apart from its next-gen system level test equipment. Both business segments go hand-in-hand. The strategy is to secure customers’ purchase of the test equipment, build up the network and then provide the maintenance contracts. Gaining market share in the sale of System Level Test (SLT) equipment is important and is the first step. Currently, AEM’s test equipment competitors are Teradyne and Advantest.
To fend off competition in the SLT arena, AEM has revamped their high parallel test cell platform, Asynchronous Modular Parallel Systems (AMPS). According to the management, “A key differentiator that sets AEM’s AMPS SLT+ solution apart is its full-stack solution that ranges from high-speed device handling, seamless integration of test content, advanced thermal control, intelligent data tracking, and factory 4.0 automation readiness”.
And then in August 2022, AEM launched the new SLT equipment – Trident, which touts to incorporate AEM’s “long pedigree in advanced thermal control”.
Apart from SLT business, recent data indicates that the tooling consumables segment has become the biggest revenue contributor for AEM. For FY2022, the Consumables segment contributed $334 million of revenue whereas the Test & Automation Equipment segment contributed $294.3 million. Services segment accounted for the rest $242.1 million.
Previously, the Group shared that the Serviceable Addressable Market (SAM) for its Test 2.0 equipment was an eye-popping US$3 billion. The growing recurring demands for AEM’s kits, pans, and spares are underpinned by a growing installation base of more than 1,000 Test 2.0 tools. Based on my estimation, this volume ramp is still at the early phase as AEM has recently acquired three new customers. As the Group deepens its technical engagement, the SAM for its Test 2.0 should continue to grow further.
Acquisitions curtailed by balance sheet
If I am not wrong, AEM should need at least one more acquisition. Hopefully, it would be one of the listed technology companies in SGX – Micro-Mechanics, UMS, ISDN or Frencken. Ideally, I would like the next candidate to be Micro-Mechanics, which produces tooling and precision components for the semiconductor industries. However, looking at the balance sheet, it is unlikely that there will be any acquisitions in FY2023.
Cash holding dropped to $127 million as at 31 December 2022 vis-à-vis $216 million as at 31 December 2021. To meet Intel’s mid-term ramp needs, the Group is investing in longer dated, non-cancellable purchase orders, equivalent to $280.0 million. As a result, the Group recorded an increase in inventories from S$204.9 million as of 31 December 2021 to S$367.7 million as of 31 December 2022.
Apparently, the need to conserve cash also led AEM to issue a lower final dividend of $0.036 versus the $0.05 given in FY2021. On this note, some investors may be quite disappointed given the stellar financial performance.
The meltdown of AEM share price has led to the market capitalization to yo-yo around the $1 billion mark. Will this prompt the management to intervene? Frankly speaking, with the amount of cash on hand, I doubt there will be sufficient funds for shares buybacks. Furthermore, the Group also needs the cash for working capital.
Admittedly, the abrupt downturn in the semiconductor industry has totally caught me by surprise. On hindsight, I have made the mistake of entering this counter on the high side ($5.22) in 2022. In the following months, I may dollar cost average my investments as I foresee that the share price will continue to be bearish till the end of the year.
That said, is this really the end of the road for AEM? Honestly, I do not think so. While the downturn in the semiconductor industry has led to a crisis of confidence in AEM share price, the Group has pivoted itself as a technology company that thrives on innovation. In this regard, the long-term potential is there but existing investors need to have strong holding power to withstand this winter. Till then, enjoy the ride.