Robotic arms with silicon wafers for semiconductor manufacturing

PhonlamaiPhoto/iStock via Getty Images

ACM Research, Inc. (NASDAQ:ACMR) just about doubled revenue and earnings in its latest report. However, as impressive as the results were, they were negated by an outlook that leaves much in doubt. The stock posted modest gains after the report, but came nowhere close to making up for the huge losses it has suffered in 2022, especially in the last four weeks. Why will be covered next.

Quarterly results at ACMR reached new heights, but they have likely peaked for the time being

ACMR easily blew past expectations for the top and the bottom line. Estimates expected revenue of $113M and non-GAAP EPS of $0.23 in Q3, but revenue increased by almost 100% YoY to $133.7M, a new all-time high. Shipments increased by 64% YoY to $163M. Recall how the numbers in Q1 were weighed down by COVID-19 restrictions in China and the latest numbers suggest that issue has been fully resolved.

GAAP EPS increased by 113.3% YoY to $0.32 and non-GAAP EPS increased by 121% YoY to $0.42, which is easily a new record high. Note that gross margins were much higher than the usual 40-45% due to a better product mix. Cash, cash equivalents, restricted cash and time deposits totaled $473.2M. The table below shows the numbers for Q3 FY2022.

(GAAP)

Q3 FY2022

Q2 FY2022

Q3 FY2021

QoQ

YoY

Revenue

$133.709M

$104.395M

$67.013M

28.08%

99.53%

Gross margin

49.3%

42.3%

44.3%

700bps

500bps

Income (loss) from operations

$31.636M

$20.035M

$11.795M

57.90%

168.22%

Net income

$21.004M

$12.236M

$10.155M

71.66%

106.83%

EPS

$0.32

$0.18

$0.15

77.78

113.33%.

(Non-GAAP)

Revenue

$133.709M

$104.395M

$67.013M

28.08%

99.53%

Gross margin

49.4%

42.4%

44.5%

700bps

490bps

Income (loss) from operations

$33.529M

$22.004M

$13.073M

52.38%

156.48%

Net income

$28.178M

$14.628M

$12.352M

92.63%

128.13%

EPS

$0.42

$0.22

$0.19

90.91%

121.05%

Source: ACMR Form 8-K

However, the strong results were countered by an outlook that raises more questions than it answers. ACMR lowered its FY2022 guidance from the previous $365-405M to $365-385M. Q4 revenue is thus projected to be $85-105M, which implies a roughly 30% sequential decline compared to Q3 at the midpoint. On a YoY basis, it is expected to remain flat at $95M. From the Q3 earnings call:

“As a result of new U.S. trade policy and supply chain constraints, we have lowered the upper end of our full year revenue outlook. We now expect the 2022 revenue in a range of $365 million to $385 million versus the previous range of $365 million and $405 million.

The range of the company's 2022 outlook reflects among other things, the impact from the new U.S. trade policy, supply chain constraint, various of spending scenario for the production ramping of key customer and timing of our acceptance of first tool on the evaluation field and assuming stability with respect to the COVID-19 pandemic in China.”

A transcript of the Q3 FY2022 earnings call can be found here.

The stock has yet to recover

The mention of the new U.S. trade policy refers to new export rules implemented by the U.S. Department of Commerce on October 7. These rules essentially seek to restrict China from accessing the tools needed to manufacture leading-edge semiconductors. Some of the equipment from ACMR relies on U.S. components and the inability to source more of them will effectively bar ACMR from supplying relevant equipment to affected customers in China.

The issue of export rules dominated the earnings call and management went to great lengths to point out that most of its sales to clients are not affected by the current rules. ACMR also believes that it may be able to find a workaround by using non-U.S. replacements for U.S. components, although that will require a new round of qualification for modified equipment, something that is both costly and time consuming.

The market reaction to the new rules was immediate. The chart below shows how the stock fell off a cliff after October 7. The stock was worth $12.30 before the new rules were announced, and it is now worth slightly more than half that amount at $6.61, despite a 6% increase in the value of the stock after the Q3 report. The stock has fallen 77% YTD.

ACMR chart

Source: finviz.com

The stock’s decline appears to have been amplified by shorts. Short interest was at 1.2M on the last day of 2021, but it stood at 4.5M as of October 14, which translates into a short float of about 10.2%. On the other hand, it’s worth noting that short interest has declined and it is well off the peak reached in mid-July when short interest reached 7.8M.

The change in short interest may have been motivated by the drop in valuations for ACMR. The table below shows some of the multiples ACMR trades at currently. For instance, EV/EBITDA is in the low single digits. The stock also has the distinction of trading below book value, which some people regard as evidence that the stock is undervalued. Keep in mind though that multiples are subject to change, especially if ACMR’s trade relationships with its customers are more adversely affected by U.S. trade policy than expected.

ACMR

Market cap

$391.76M

Enterprise value

$180.63M

Revenue ("ttm")

$375.4M

EBITDA

$66.3M

Trailing GAAP P/E

10.24

Forward GAAP P/E

12.36

PEG ratio

0.29

Price/sales

1.04

Price/book

0.61

EV/sales

0.48

Trailing EV/EBITDA

2.73

Forward EV/EBITDA

3.07

Source: Seeking Alpha

ACMR used to trade at what some would say were sky-high valuations before the U.S. started to impose sanctions on some of ACMR’s top customers in 2020. For instance, ACMR had a P/E ratio of 131 at one time. In contrast, competitors like Applied Materials (AMAT) and Lam Research (LRCX) had P/E ratios of 19x and 25x, respectively, as mentioned in an earlier article from 2020.

While ACMR was riding high at that time, the article warned about possible sanctions from the U.S. government and the impact it could have on ACMR, especially in light of its reliance on China and its high valuations. This turned out to be absolutely warranted in hindsight, with the U.S. government passing increasingly restrictive export rules in the last two years aimed at China.

The most recent export rules are just the latest in a long list of rules targeting China. Odds are ACMR has not seen the last of these trade restrictions. The U.S. government is by no means restricted from passing even more stringent regulations. More rules could be in the pipeline that could make it even more difficult for ACMR to do business with its existing customers in China.

Investor takeaways

The Q3 numbers had what it took for the stock to pop, especially with the stock having fallen as much as ACMR has. They were that impressive with both revenue and EPS doubling in size. Unfortunately, the recent U.S. export rules have stolen the spotlight from everything else. It’s telling that the stock has lost half its value in the last four weeks since the rules came into effect. The export rules, the latest in a long list going back two years, are seen as a powerful headwind for ACMR.

The latest guidance suggests these concerns are not without merit. It’s true guidance was only lowered by several tens of millions, which might not seem that bad. ACMR has also stated that most equipment are not affected and it could find workarounds by finding replacement parts for those that are, but the question is whether the U.S. government will impose even more restrictive rules that could, for instance, hamper the sale of equipment that are currently not affected.

It’s also worth asking how companies in China will react to the latest rules. ACMR has a subsidiary in China, but its headquarters is in the U.S. Some Chinese companies may prefer to stay away from companies like ACMR that are perceived to fall under U.S. jurisdiction and therefore vulnerable to U.S. government policy. ACMR is not a truly homegrown company from China’s perspective, unlike some of its competitors in China and it may lose ground in China for that reason, a country which has contributed up to 98% of ACMR’s revenue YTD.

I am neutral on ACMR. The arguments in favor of going long have strengthened in some ways. Unlike the past, multiples look very appealing. ACMR has an enterprise value of just $181M, which means ACMR is, for instance, valued at less than 0.5 times sales. The fact that the stock trades below book value suggests to some that ACMR is undervalued.

At the same time, stocks trading below their book value are often times in some sort of distress, often financially. In theory, while there is a risk ACMR could get to that point, the trade relationship would have to deteriorate even more than it has up to now. At this time, there is not much of any distress to be found in the income statement or the balance sheet of ACMR. Both are in good shape. One could argue the current set of trade restrictions are not as bad as feared. Some may conclude long ACMR is worth it when the above is applicable to ACMR.

With that said, the stock’s history over the past two years suggests the risk of long ACMR is not worth taking. It’s also worth noting how the U.S. government has gradually tightened the screws by imposing ever more restrictive rules, which suggests ACMR’s access to China is more likely to get worse than better in the future.

The fact that the stock has not gained with all its growth, but instead lost ground in the two years since the issue of trade restrictions popped up says a lot. ACMR’s growth looks impressive, especially at present valuations, but the possibility it could come to a fairly sudden end is reason to take pause. Multiples may seem low, but that’s because there’s a lot of risk associated with ACMR. Long ACMR could pay off at current levels, but anyone interested in ACMR, whether long or short, should accept that any position can go against them in the blink of an eye.

Bottom line, ACMR would do well to become more diversified and the company is working on doing just that, but it has ways to go before it gets to that point. Some sort of understanding between the U.S. and China would also work wonders for ACMR. As it stands, ACMR may go on temporary rallies, but it is just as likely to sell off like it did recently with the stock losing half its value. This being the case, staying on hold is the way to go.