yclinf/iStock via Getty Images
yclinf/iStock via Getty Images
It’s fair to say that holding on to Amkor Technology (AMKR) has not proved worthwhile for some time. AMKR has basically gone sideways for months, which may cause some to give up on AMKR and jump ship. The stock did end 2021 on a strong note, but it’s not off to a good start in 2022. Volatility has gone up with the stock making big moves up and down, far more than in the past. AMKR has lost some appeal, but there are still reasons to hold on to the stock. Why will be covered next.
AMKR ended 2021 on a strong note. The stock rallied with a gain of 14% to cap off what was a volatile year. The stock got out of the gates strong in 2022, gaining another 5.8% on the first trading day of 2022. However, this did not last long. The stock lost 5.9% last Friday and it’s now down 4.4% YTD.
finfiz.com
finfiz.com
The final numbers show that 2021 was a good year for the stock. AMKR appreciated by 64% in 2021, but most of its gains came in the early part of the year. The stock was up 88% at one point in 2021. There has been a lot of volatility and the stock has made lots of big moves up and down, but, at the end of the day, AMKR has essentially gone sideways for much of 2021.
The early struggles in the new year should not come as a surprise. AMKR falls under tech and tech has fallen out of favor lately. Loose monetary and fiscal policies has forced global capital to search for havens where they can get a better return. The biggest beneficiary of this trend has arguably been stocks, tech in particular. Semis are part of tech and they too have benefited handsomely in recent years.
However, the Federal Reserve intends to tighten monetary policy in 2022, which has caused capital to move towards sectors that stand to benefit from higher interest rates. Tech has underperformed as a result. For instance, the Energy Select Sector SPDR Fund (XLE) has gained 10.5% YTD and the Financial Select Sector SPDR Fund (XLF) has gained 5.4% YTD, the former with the aid of geopolitical tensions. In contrast, the Technology Select SPDR Fund (XLK) has lost 4.6% YTD.
This rotation out of tech has affected semis. For instance, the iShares PHLX Semiconductor ETF (SOXX) has lost 3.9% YTD or slightly less than AMKR. Furthermore, the Fed could become even more hawkish due to the pressure of higher inflation, which could lead to a further selloff in tech stocks with a faster tightening of monetary policy. The Fed is unlikely to change course anytime soon, which suggests semis, AMKR included, will have to deal with a powerful headwind for some time. Overcoming strong headwinds is not easy.
Semis are faced with a headwind that wasn’t there before. On the other hand, semis can still count on a strong demand environment for semiconductor chips. According to a recent forecast, the worldwide market for semiconductors is expected to grow by 8.8% YoY to $601B in 2022, a new all-time high. AMKR is a provider of outsourced semiconductor packaging and test services. As such, AMKR should benefit from robust demand as the market for semiconductors expands.
In addition, AMKR trades at relatively low valuations. If anyone is interested in riding the market for semiconductors higher, then AMKR offers a way to place a bet without breaking the bank. The table below shows the multiples AMKR trades at. For instance, AMKR has an enterprise value of $6.6B, which is equal to 5.4 times EBITDA.
AMKR
Market cap
$6.16B
Enterprise value
$6.64B
Revenue (“ttm”)
$5,784.7M
EBITDA
$1,235.9M
Trailing P/E
10.45
Forward P/E
9.80
PEG ratio
0.13
P/S
1.00
P/B
2.12
EV/sales
1.15
EV/EBITDA
5.37
Source: Seeking Alpha
It’s also worth mentioning that while the stock has not made headway in recent months, the same cannot be said of quarterly earnings. On the contrary, AMKR posted record highs for revenue, operating income, EBITDA and EPS in its most recent report. Q3 revenue increased by 24.2% YoY to $1,681M and GAAP EPS increased by 94.7% YoY to $0.74. EBITDA increased by 40.4% YoY to $358M. Advanced packaging was a growth driver once again. The table below shows the numbers for Q3 FY2021.
(GAAP)
Q3 FY2021
Q2 FY2021
Q3 FY2020
QoQ
YoY
Net sales
$1,681M
$1,407M
$1,354M
19.47%
24.15%
Gross margin
19.3%
19.4%
17.8%
(10bps)
150bps
Operating margin
12.6%
11.0%
9.4%
160bps
320bps
Operating income
$211M
$155M
$127M
36.13%
66.14%
Net income
$181M
$126M
$92M
43.65%
96.74%
EPS
$0.74
$0.51
$0.38
45.10%
94.74%
(Non-GAAP)
EBITDA
$358M
$295M
$255M
21.36%
40.39%
Source: AMKR Form 8-K
Guidance calls for Q4 FY2021 revenue of $1.59-1.69B, an increase of 19.7% YoY at the midpoint. It’s also a decline of 2.4% QoQ, but this decline is in line with seasonal trends. The forecast expects EPS of $0.55-0.75 in Q4, an increase of 25% YoY at the midpoint. FY2021 revenue and EPS are projected to increase by 19.9% and 71.9% respectively YoY.
(GAAP)
Q4 FY2021 (guidance)
Q4 FY2020
YoY
Net sales
$1.59-1.69B
$1.37B
16.06-23.36%
Gross margin
18.0-20.5%
20.3%
(105bps)
Net income
$140-190M
$127M
10.24-49.61%
EPS
$0.55-0.75
$0.52
5.77-44.23%
It’s also worth noting that AMKR is dealing with supply chain constraints, which is keeping a lid on growth. From the Q3 earnings call:
“For the fourth quarter, we expect robust year-on-year growth of 20% with revenue of $1.64 billion. Supply chain constraints of substrates and components are expected to continue into Q4 and into the next year. We expect a gradual recovery in the second half of next year when new capacity comes online. We are working closely with our customers and suppliers to help mitigate risks from these ongoing constraints. The main catalyst for future growth, our 5G, IoT, automotive and high-performance computing and Amkor is well positioned in these key markets.”
A transcript of the Q3 FY2021 earnings call can be found here.
AMKR continues to have its strong points. The market for OSAT services continues to be in good shape. Solid demand has helped AMKR grow its top and bottom line, which is reflected in the most recent quarterly numbers. Revenue, operating income, EBITDA and EPS all reached record highs. In addition, AMKR continues to trade at multiples that in some instances are in the single digits, giving investors the opportunity to bet on a booming market for semiconductors at a price that should be palatable to most.
However, while the strong market environment for semiconductors has not changed, the same cannot be said of the stock market. Easy monetary policy has provided a tailwind for stocks, providing them with the means to do well, but this looks set to reverse in 2022. Inflation is going up, which means the Fed has to respond. The traditional remedy for higher inflation is to tighten monetary policy, creating a less favorable environment for stocks to do well. This does not mean stocks cannot do well, but they will have to rely on something else to move higher because stimulus won’t be there to provide as much of a lift as in prior years.
It’s early in the year, but AMKR might be stuck between two opposing forces. On the one hand, the combination of a strong outlook for the semiconductor market, earnings growth and low valuations could help it attract buyers and push up the price of the stock. On the other hand, the Fed can push down semis, just like how it pushed up semis through its policies. Semis have benefited from the infusions of liquidity from the Fed, but AMKR will be hard pressed to not get dragged along if semis and the stock market as a whole sell off once liquidity goes in the other direction.
I am bullish AMKR as reiterated in a previous article, but longs should expect to deal with more volatility in 2022. The volatility in the first week of the year could be a harbinger of what to expect in 2022. In fact, longs should not be surprised if the stock disappoints in 2022, even though earnings are likely to be strong.
The Fed is on a collision course with inflation. The mandate is to keep inflation under control. In order to fight inflation, the Fed needs to tighten. And with inflation as high as it is, the Fed needs to tighten by a lot and not by a little bit if it wants to have a measurable impact on inflation. This tightening process may not affect stocks right away since stocks can do well in the early stages of the tightening process, but it will eventually.
This being the case, longs are unlikely to see the kind of returns in 2022 that 2021 delivered. The stock might even end the year down, depending on what happens in the stock market. The stock is most likely to see-saw, being pushed in opposite directions by opposing forces, until one gives way. This situation is likely to last as long as the Fed embarks on a tightening of macroeconomic conditions and there’s no way of knowing for sure when it will all end.
The good news is that if recent history is any indication, the Fed is unlikely to accept big drops in the stock market due to the impact this has on the wider economy. Once this happens, the Fed tends to moderate its messaging to prop up stocks as much as it can. This may take a while though. Until then, longs have to be patient and keep their immediate expectations in check.
This article was written by
Disclosure: I/we have a beneficial long position in the shares of AMKR either through stock ownership, options, or other derivatives. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.
