Semiconductor stocks have been a focal point for investors over the past year, with the likes of Nvidia and Advanced Micro Devices winning most of the attention because of their fast-growing presence in artificial intelligence (AI).
But the AI opportunity is rapidly expanding, and one under-the-radar chip specialist says it's very excited to play a significant role in the industry, one that could drive its growth for several years. That company is Axcelis Technologies(NASDAQ: ACLS).
Axcelis stock has gained a whopping 537% over the past five years, even after accounting for the 42% slump from its all-time high, which was set last September. Despite its massive returns, it remains one of the cheapest stocks in the semiconductor space -- but that might not be the case for long.
A unique opportunity in the emerging AI industry
Nvidia and AMD make graphics processing units (GPUs) for the data center that are designed to process AI workloads. Many investors consider those companies to be picks-and-shovels plays in the AI space, because GPUs are the tools developers need to create their AI models. By that logic, Axcelis Technologies is a picks-and-shovels play on AI chipmakers.
Axcelis doesn't make any semiconductors itself, but rather it manufactures ion implantation equipment that is critical to the fabrication process. Producers of GPUs, CPUs, memory (DRAM), and storage (NAND) chips can't create their hardware without the advanced process technologies and systems Axcelis provides.
CEO Russell Lowe says AI will require significant manufacturing capacity additions across the semiconductor industry, which means more equipment sales for Axcelis. AI won't just be a data center GPU story for much longer -- Lowe is preparing Axcelis for the proliferation of this technology as it enters every device, smartphone, and personal computer. Chipmakers like AMD and Micron Technology are already experiencing significant demand for their AI-enabled chips in those very segments.
Axcelis is also a technology leader in the power device segment. Power devices are designed to deliver and regulate electric power in high-current applications, and they are critical in consumer products like electric vehicles to deliver fast charging times and maximum mileage per charge. However, they are also increasingly important in electricity-hungry data centers, where they help generate, store, and distribute power.
Axcelis has struggled to keep up with demand over the past couple of years, and it finished the first quarter of 2024 (ended March 31) with an order backlog worth $1.1 billion. Keep in mind that this company is only valued at $3.6 billion as of this writing.
Image source: Getty Images.
2024 revenue might be flat, but an upturn is coming
Axcelis is coming off an incredible run of growth. Its revenue jumped 23% in 2023 to a record $1.13 billion, which followed 39% growth in 2022, despite an inventory glut across traditional consumer segments of the chip industry that impacted sales.
However, Axcelis' revenue for the first quarter of 2024 dropped 6.5% compared to the year-ago period, coming in at about $252 million. Management predicted revenue would be flat in 2024, with the second half likely showing more strength than the first as the cyclical nature of some of its core segments kicks in. However, this will only be temporary, with revenue expected to return to growth in 2025, coming in at $1.3 billion.
During this slow period, Axcelis is focusing on managing costs and improving its gross profit margin. Gross margin was 46% in Q1 compared to 44.4% in the year-ago period, and it helped the company deliver earnings per share of $1.57, which was an increase of 9.8%.
In short, Axcelis managed to make more money during Q1 despite generating less revenue. Therefore, when its revenue returns to growth in 2025, it could drive a significant acceleration in profitability.
Axcelis stock looks like a bargain
Based on Axcelis' trailing-12-month earnings per share of $7.57 and its current stock price of $111.45, it sports a price-to-earnings ratio (P/E) of 14.7. That's a 52% discount to the iShares Semiconductor ETF, which trades at a P/E of 30.9. This implies that Axcelis stock will have to more than double just to be valued more in line with its peers in the chip sector.
Axcelis stock also trades at a discount to the S&P 500 index (P/E ratio of 22.6) and the Nasdaq-100 technology index (29.5). In other words, it's significantly cheaper than the broader market right now, too.
The company's strong growth might be taking a breather in 2024 per management's guidance, but investors who can buy the stock and hold on for the next few years could be getting an absolute bargain right now. After all, its $1.1 billion order backlog supports a return to revenue growth in 2025 as expected.
Longer-term, the AI opportunity is staggering. Nvidia CEO Jensen Huang says more than $1 trillion worth of existing data center infrastructure needs to be upgraded to support demand from AI developers. Axcelis is well-positioned to capture a small slice of that value, but it's just the tip of the iceberg as AI continues to expand beyond the data center.
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Anthony Di Pizio has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Advanced Micro Devices, Nvidia, and iShares Trust-iShares Semiconductor ETF. The Motley Fool has a disclosure policy.
