Today we have a speculative idea: take stock of semiconductor equipment manufacturer ACM Research (NASDAQ: ACMR), in order to make money on their rebound.
Growth potential and validity: 16% behind 12 Months; 10% per annum during 10 years.
Why stocks can go up: semiconductor boom affects all businesses, that are associated with their production, including cleaning - this is a necessary step in the creation of semiconductors. In addition, stocks fell - it's time to pick them up.
How do we act: we take shares now by 78,60 $.
When creating the material, sources were used, inaccessible to users from the Russian Federation. We hope, Do you know, what to do.
No guarantees
Our reflections are based on the analysis of the company's business and the personal experience of our investors, but remember: not a fact, that the investment idea will work like this, as we expect. Everything, what we write, are forecasts and hypotheses, not a call to action. To rely on our reflections or not – it's up to you.
And what is there with the author's forecasts
Research, like this and this, talk about, that the accuracy of target price predictions is low. And that's ok: there are always too many surprises on the stock exchange and accurate forecasts are rarely realized. If the situation were reversed, then funds based on computer algorithms would show results better than people, but alas, they work worse.
So we're not trying to build complex models.. The profitability forecast in the article is the author's expectations. We specify this forecast for the landmark. As with the investment idea in general, readers decide for themselves, it is worth trusting the author and focusing on the forecast or not.
We love, appreciate,
Investment editorial office
What the company makes money on
In the production of microelectronic products, semiconductor wafers go through a complex technological route, which includes chemical cleaning of contaminants. Wet cleaning is needed to improve the performance of integrated chips around the world. ACM is precisely engaged in the development and production of machines for such cleaning..
According to ACM 2020 Annual Report, The company's revenue is distributed as follows:
- Equipment for wet cleaning of plates and equipment for processing - 87%.
- Plate Coating Equipment, other processing equipment, services and spare parts — 13%.
The company headquarters is located in the USA, but the main production and research resources are based in Shanghai, there are also engineering departments in South Korea.
China is the main market for products: 99% products are sold in China, part of ACM products is bought by Chinese subsidiaries of non-Chinese companies such as the South Korean SK Hynix, and about a percent goes to the rest of the world. This is important for our history.
The company plans further Asian expansion: exit to korean, Thai and other Asian markets, – after which ACM is going to enter a wider international market.
Arguments in favor of the company
Stocks out of whack. Since October, the value of shares has fallen sharply - from 117 to 77,62 $. On the one side, last quarterly report is not outstanding, On the other hand, there is no particular reason to panic., because there is growth in the report. All this provides an excellent opportunity to pick up shares in anticipation of a recovery in demand and settlement of contentious issues.. To all other, the share price is greatly understated in relation to, how much should they cost, based on financial performance, - after all, anyway, the company has growth.
Semiconductors are more relevant than ever. The crisis in this industry is still not over, and semiconductor manufacturers are trying to increase production volumes, to meet the demand. And China is one of the main producers and importers, from the chips of which even the United States does not refuse, despite all sanctions and trade wars.
With the increase in the production of semiconductor wafers, the demand for their mass cleaning will also increase.. This is where the experience of ACM and their favorable geographical location come in handy.. In addition, the company continues to develop new installations in order to, to provide all manufacturers with the right equipment for less money.
Literally in December, the company received a large order in the United States, which the, among other things, speaks of demand not only in China. So we can count on, that the company's revenue will continue to grow.
Can pump up. The company has a capitalization of about $1.51 billion. This is very small and can help attract retail investors into the company's shares., who read on the Internet, that "semiconductors are a hot topic now".
Can buy. Considering all of the above, the company may well be bought. In our opinion, very likely to be bought by one of the larger competitors: Lam Research или Applied Materials. ACM is not cheap, but not insanely expensive to call her: P / S — 8,04 and P / E — 54,71. And in absolute numbers, the company is inexpensive - less than $ 2 billion.
At the same time, the market for equipment for the production of semiconductors is actively growing., and the leaders in growth are just the countries of East Asia, where ACM is strong. So I believe, that ACM may well be bought with an eye to "expansion in Asia".
Assessment of the market of equipment for the production of semiconductors by region, billion dollars
| Position | Region | Market size | CAGR 2016—2021 |
|---|---|---|---|
| 1 | Korea | 18,9 | 19,5% |
| 2 | China | 16,8 | 20,7% |
| 3 | Taiwan | 15,6 | 5,2% |
| 4 | Japan | 7,9 | 11,2% |
| 5 | North America | 6,1 | 6,6% |
| — | The rest of the world | 6,5 | 2,3% |
What can get in the way
Today you received a grant, and tomorrow - a pro-Chinese collaborator. The US government has been getting a lot of headaches from China lately.. In this regard, putting a spoke in the wheels of Chinese companies has become a popular initiative among US regulators., and the US Securities and Exchange Commission (SEC) issued amendments, which prohibit trading in the company's securities on the US stock exchange, if the company has a foreign audit firm, which cannot be reviewed by a public company accounting oversight board for three consecutive years. But it is so, flowers.
According to the latest news, Americans seriously intend to kill the high-tech sector of the PRC. By the way,, one of the major partners and clients of ACM, Chinese SMIC, generally under US sanctions - and to do business with it, ACM has to obtain special permission from the US government, the issuance of which may be terminated.
Since ACM is an American company, who lives in China, the US government may have other questions about it. For example, ACM Received Over $7 Million in Grants from the Chinese Government in 2018-2020. Not that it was crazy much, but in the American justice system, as we remember from the scandal with the "participation of Russian hackers in the US presidential election", an unfriendly prosecutor may well spin this story to the level of “in exchange for grants and comfortable business conditions in China, ACM sold its homeland”. This news will send ACM quotes straight to hell.
However, the director of ACM has already responded, that they will soon take all necessary measures to, to keep the SEC happy, so, maybe, this cup will pass ACM.
At the same time, there is a possibility, that the "Chinese discount" is already included in the price of these shares and that is why the quotes are marking time. Maybe, investors do not risk investing in ACM, because they are afraid of that, that a trade war between the US and China will kill the company's business. So,, our hopes, that the company will be bought or at least the shares pumped up by retail investors, will not justify.
Concentration. In its presentation, the company mentions the main customers and indicates, what percentage of the revenue comes from each:
- Shanghai Huali Microelectronics (HLMC) — 37%.
- Yangtze Memory Technologies — 27%.
- Semiconductor Manufacturing International Corporation (Minimum wage) — 12%.
- SK Hynix - less 10%.
Changes in the relationship with one of these clients, or simply troubles they have, can have an extremely negative impact on ACM reporting..
Accounting. ACM does not suffer from excess money: she has 65 million dollars in accounts and approximately 97.9 million debts of counterparties. She has about $227 million in debt., of which 195.2 million must be repaid within a year.
The ratio is not the worst., but should be understood, that high-tech production of the company requires large investments. It is quite logical to expect, that the company's debt burden will increase. This, given the growth in the cost of loans, will not be at all good - and can scare away investors from the company's shares. Moreover, taking into account the risks listed above, it will be difficult for the company to receive the required amount at a sane percentage..
Very expensive. Company P / E above 50, and that in itself is not good.. So quotes can be very volatile..
What's the bottom line?
Shares can be taken now by 78,60 $. And then there are two options:
- wait for growth to 90 $ within 12 Months. In the new year, with all the arguments, this is a rather modest goal.;
- keep shares next 10 years, because quantum computers are still far away, and the wafers will need to be cleaned. The company is well invested in research and will certainly maintain its leadership in Asian markets..
But remember, that US-China relations are unpredictable and the company is highly dependent on the international situation, that's why, if you are not ready to endure shaking, better pass by.
And if you take these shares and then they fall, then seek solace in the wisdom of Epictetus: in this world we can't control anything, apart from your own actions.
