ACM Research Sees Strong Growth But May Face International Headwinds

Summary

• ACM Research had a strong FY23 with significant sales growth across all segments and is making progress towards their $1b revenue goal.
• The company is expanding operations internationally and expects to complete its Lingang facility in Mainland China in mid-2024.
• ACM may face headwinds in their international expansion as tensions grow between the US and China.

ACM Research (NASDAQ:ACMR) experienced a strong FY23 as the firm realized significant sales growth across all segments for their cleaning, plating, and furnace technologies. Management is currently expanding operations internationally and anticipates the completion of their Lingang facility in Mainland China in mid-2024, further bolstering their footprint across the semiconductor manufacturing process. Through international expansion, I believe ACM can reach management’s $1b revenue target by eFY26 and anticipate modest margin expansion as their sales scale following near-term headwinds in eFY24. I provide ACMR shares a BUY recommendation with a price target of $43.17/share at 2.79x eFY26 net sales.

Operations

ACM Research had an exceptionally strong FY23 in terms of revenue growth and margin expansion. This year was a very pivotal year as it set a strong trajectory for the firm to reach $1b in annual revenue. Though guidance for eFY24 is expected to grow at 23% y/y to $650-$725mm, the firm is well-positioned to reach that target in the next 3-5 years. With a TAM of $16b, ACM has a strong opportunity to take on market share and grow the business beyond mainland China in more advanced semiconductor markets. I believe that there is a huge opportunity stateside for ACM as more firms are developing chip fabs across the US in anticipation of grants and tax credits under the CHIPS Act. Given that advanced packaging is dominated by few firms outside of China, I believe ACM has the potential for a major opportunity as US-based companies near-shore the semiconductor manufacturing lifecycle. In terms of advanced packaging, Amkor (AMKR) is the primary OSAT company outside of Mainland China. As the final stage of chip manufacturing, ACM has room to expand this operation despite only accounting for 9% of total revenue in FY23. As more firms move to 2.5D and 3D stacks and chiplet architecture, I believe ACM can realize significant growth and build out their corner of the AI chip manufacturing process.

In terms of growth in 2024 and 2025, management anticipates 2024 to be a year of development with 2025 being the year to release Track and PECVD. Come 2024, ACM will see revenue contributions coming from some of their newer products, such as furnace, SAPS cleaning tool, and ULTRA C v Vacuum Cleaning Tools. Despite slower revenue growth in eFY24 vs. FY23, I anticipate eFY25 to be a pivotal year for ACM as they bring their PECVD to production and the sales cycle.

ACM will be working to get ahead of the curve in the coming year as management anticipates capital investments to reach $80b as the firm completes construction of their Lingang production and R&D Center, builds out their R&D facility in Korea, and a facility in the US. Management will be focusing their efforts in developing international exposure outside of Mainland China in eFY24 as there is a broader, addressable market for ACM to cater to in advanced chip manufacturing. In terms of their broader product line, ACM is targeting a 40% market share of the $2.4b market in Mainland China and sees a $12.6b opportunity internationally.

The firm does face the challenge of significant customer concentration with SMIC taking up 18% of revenue, SiEn at 15%, and CXMT at 13% for a total top-3 concentration of 46%. Considering that the majority of ACM’s customer base is located in Mainland China, I can see some international challenges as a geopolitical risk for expansion. Though I do not believe that this will be a complete hindrance, I do see some impediments and potentially a longer sales cycle, especially in the US. At a high level, the US is becoming more hesitant in working with China-based tech companies as data hosting and transfer at edge and cloud networks is generally seen as a risk. Though the Biden administration’s call to investigate electric vehicles is relatively focused, I believe that a company with products catering to the semiconductor manufacturing process will be more heavily scrutinized.

Looking at ACM’s financials, I do anticipate slight margin compression in eFY24 as the firm continues to develop their international presence.

Presently, I anticipate ACM to reach their $1b revenue target by eFY26 given their current growth rate and the cyclical upcycle in international foundry development. As more firms adopt more advanced chips, I believe ACM’s testing and packaging technology will advance further with their 2.5D/3D packaging technology. The biggest headwind I anticipate is geopolitical risk as distrust for data leakage becomes more apparent stateside, even if the company isn’t directly related to the issue. If challenges do arrive as a result of this geopolitical risk, revenue growth will need to be revised down as much of this growth is the result of international expansion.

Valuation And Shareholder Value

ACMR shares currently trade just under 4x trailing sales after their stock’s significant performance since reporting FY23 earnings. Shares have surged ~60% post-earnings and appear to be on a continuation of their upward trend in the near-term, based on their technical characteristics, despite leaning towards overbought using their RSI.

In terms of valuation, shares are currently priced at 2.19x eFY26 sales, the period when I believe ACM to break through the $1b revenue mark. ACMR shares are trading at a relatively high valuation in terms of historical multiples; however, they may be experiencing their initial interest intake as new investors take notice of ACM’s recent performance. This similarity happened to Super Micro Computer (SMCI) in their recent run-up as the firm anticipates significant demand to funnel through as a result of the AI boom. If ACM’s revenue generation remains consistent with their expectations, I believe that this can very well be a revaluation and that shares can be priced at a higher range. I do want to note that with the higher valuation comes greater downside risk as the share price is heavily dependent on ACM’s ability to consistently grow at and outpace the market. Given the firm’s small international exposure and growing demand for their products outside of Mainland China, I do believe that ACM can experience substantial growth and sustain a higher valuation. I provide ACMR shares a BUY recommendation with a price target of $43.17/share at 2.79x eFY26 sales.