Amkor Technology: Weak Near-Term Guidance Has Created A Buying Opportunity Post-Q2

Monty Rakusen Introduction Amkor Technology (NASDAQ:AMKR) just released its Q2’24 results and guidance came in lighter than expected. However, given an 18% drop in shares, I believe shares offer compelling value given Amkor’s strong market position in the outsourced assembly and test manufacturing market and its differentiated portfolio of advanced packaging solutions. In my view, the company is well-positioned to intercept the strong underlying demand trends in semiconductor and the technology transition towards more advanced packaging. It’s likely that Amkor can capture more value in the manufacturing supply chain over time on new packaging innovation/complexities. At the current valuation, the recent share price decline has provided investors an opportunity to buy a company that’s gaining share with its largest customers, benefiting from the trend to outsource manufacturing capacity. Company Overview Amkor technology is the second largest outsourced assembly and test supplier and is headquartered in the US. The company’s focus is on advanced packaging solutions (three quarters of revenues), which are faster growing and more profitable given their higher-value added services. Amkor has a leadership profile in advanced packaging, which is used across mobile devices, automotive/industrial, datacenter, and PC/consumer end applications. Amkor generated $6.5 billion in revenues for 2023, and has been delivering a high-single-digit revenue CAGR over the last several years. Major customers include Apple (AAPL), QUALCOMM (QCOM), Skyworks (SWKS), NVIDIA (NVDA), and NXP (NXPI), among others. Investor Presentation Amkor Q2 Results When looking at the latest Q2’24 results, Amkor delivered revenues of $1.46 billion, which was flat on a year-over-year basis, but beat analyst estimates by $10 million. Given margin expansion, EBITDA clocked in at $247 million with EPS of $0.27 beating consensus estimates by 5 cents. Company Press Release With EPS of $0.27, this was 3 cents higher than last quarter sequentially and 1 cent higher than Q2 last year. On operating income, margins continued to expand both on a sequential and year over year basis, with operating margins now sitting at 5.6%. Capex forecast for the year remains at $750 million, unchanged, and will be used on increasing advanced packaging capacity for 2.5D and advanced SiP as well as expanding select manufacturing facilities. Investor Presentation In my view, the resulting share price reaction was way overblown. Comparing the midpoint of the guidance range to consensus estimates heading into the quarter, Amkor’s guidance was just 1% off. Before we get into the outlook, I think it’s helpful to get into the latest quarter. In Q2’24, Amkor’s results were driven by Advanced packaging supporting premium tier smartphones and AI solutions utilizing 2.5D technology. In particular, the demand stemming from the Communications and Computing end markets was particularly strong; however, gains here were partially offset by weaker demand in addition to ongoing inventory corrections in the Automotive & Industrial and Consumer end markets. Company Press Release The Communications segment includes smartphones and tablets. The company has broad penetration in the applications used for the smartphone market, including RF front end, sub-6 Ghz & mmWave, sensors, storage, wireless charging, baseband, apps processor, and sub-systems processor. Higher performance requirements, expanded features, and increasing power consumptions are driving greater miniaturization and higher levels of integration, all of which are enabled by advanced packaging. Customers include Apple, Qualcomm, Qorvo, Skyworks, among many others. For the smartphone market, I think we could finally start to see unit growth recover in 2024 after six years of decline, led by a strong refresh cycle tied to AI smartphones. In Q1’24, the global smartphone market grew 6% year over year to reach 296.9 million unit shipments, so this alone is a positive key indicator. One important development during the quarter was that the company has now established a U.S. manufacturing facility for advanced packaging. Given that they’ve got a nonbinding preliminary memorandum of terms with the US Department of Commerce for up to $400 million in grants under the CHIPS and Science Act, it seems that the government is very supportive. Over the last few years, amidst global tension (particularly with China and Taiwan), there has been a strong push by governments and companies for more geographical diversification due to a number of concerns that span from geopolitics to potential disruptions from natural disasters. Given strong industry investments augmented by govt chip subsidies (e.g., US CHIPS and Europe), fab capacity outside of Taiwan/China is expected to increase substantially. For example, in the US and Europe, fab capacity is expected to increase by 200%+ and 125%, respectively, over the next decade With Amkor’s strategy to diversify manufacturing capacity in several countries (the U.S. and Vietnam), Amkor is well-positioned for the semiconductor on-shoring trend with global manufacturing operations across the US, Europe, and Asia, is well-positioned for this semiconductor on-shoring trend. From a balance sheet perspective, Amkor had cash and cash equivalents of $1.5 billion at the end of the quarter, with liquidity of $2.2 billion that gives the company flexibility to invest in capacity and technology. On leverage, the company has $1.1 billion in total debt, for a Total Debt to EBITDA ratio of 1.0x. Given cash greater than debt, the leverage here is very modest, and is down from 2019 levels. Investor Presentation Valuation and Wrap Up In terms of the risks to the investment thesis, the main ones would be a slowdown in the global economy, which could potentially stop demand trends out of the broader semiconductor recovery. Another risk would be a company-specific risk, where Amkor is unable to execute on its 2.5D advanced packaging capacity expansion or if AI infrastructure build-out slows. Lastly, supply chain disruptions either by suppliers or government regulation and intervention would hamper manufacturing abilities, which would almost certainly have a determinantal impact on both the top and bottom line. Based on the 8 sellside analysts who cover Amkor’s stock, there are 5 ‘buy’ ratings and 3 ‘hold’ ratings. The average price target is $42.63, with a high target of $55.00 and a low target of $35.00. From the current price to the average price target one year out, this implies about 36.9% upside, not including the 0.8% dividend yield. Given strong upside potential, analysts seem to be quite bullish on Amkor’s near-term outlook. Seeking Alpha In my view, Amkor is worthy of a valuation re-rating. At 7.6x EV/EBITDA, Amkor’s valuation is close to the most expensive they’ve ever been, above the historical ten-year average of 4.2x EV/EBTIDA (source: S&P Capital IQ). In my view, this is justified given the dynamics at play with on-shoring and the developments with AI. Author, based on data from S&P Capital IQ With a cyclical recovery underway for the semiconductor industry, combined with powerful long-term growth trends, I believe there’s an opportunity, even with the elevated valuation. Looking at consensus EPS estimates for the next few years, analysts are projecting that Amkor can grow EPS from $1.46 in 2023 to $3.20 by 2026 (source: Bloomberg). So with a macro trend for an industry recovery, outsourcing continuing to be a secular trend, and better diversification across its geographic facilities, Amkor’s shares look enticing. As such, given the drop in shares post-Q2 results, I’d be a buyer of shares at current levels.

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