Semiconductor stocks have been hot over the past year on increased demand due to artificial intelligence (AI). Axcelis Technologies(NASDAQ: ACLS) is one stock that hasn't joined the party. Shares have fallen 15% over the past year, lagging behind the broader market.
Is this under-the-radar company an undiscovered gem, or is something amiss?
Here is what you need to know about this company, which plays a vital role in manufacturing certain semiconductors.
What role does Axcelis play in the semiconductor industry?
Axcelis specializes in ion implantation, a process used to manufacture semiconductors. Ion implantation involves changing the electrical properties of silicon wafers by exposing them to ions. Axcelis builds and services the machines that perform this process. It's important to note that not all semiconductors require ion implantation. According to Zion Market Research, the ion implantation market is valued at $2.1 billion and will grow to an estimated $3.5 billion by 2030.
This is a more specialized process and not as prominent as others. For example, Mordor Intelligence values extreme ultraviolet lithography (EUV), a process used to build high-end chips, at over $10 billion. The smaller addressable market helps explain the size of Axcelis, which has $1.1 billion in annual revenue and a $3.5 billion market cap today.
ACLS Revenue (TTM) data by YCharts
Investors can see above that the uptick in semiconductor demand has been good for business these past few years. Revenue and earnings per share have soared to all-time highs. But given the more conservative long-term outlook for ion implantation as an industry, it doesn't seem like Axcelis is poised for the growth that AI is causing in other areas of the semiconductor industry.
Growth at a reasonable price
Ironically, analysts have become less impressed with Axcelis's outlook, dramatically scaling back earnings growth estimates for the long term, which spans the next three to five years. While 13% growth is still good, the broader ion implantation market isn't lucrative enough to give the company a high ceiling.
That makes buying the stock at a smart price important. Today, shares trade at 16 times their estimated 2024 earnings:
ACLS PE Ratio (Forward) data by YCharts
I like using the PEG ratio to measure how much an investor pays for a company's earnings growth. For PEG ratios, a lower number is better. I generally like buying stocks with around 1.5 or lower PEG ratios. At a PEG ratio of 1.2, investors get a pretty good deal on shares if Axcelis lives up to analysts' estimates.
What should investors expect over the long term?
While the numbers say Axcelis is a buy today, there is ultimately a problem of being a big fish in a small pond. It limits growth and can stunt investment returns. You see, Axcelis has been around for years and hasn't done much to expand beyond its core business. The stock boomed in the early 2000s and spent the next 20 years recovering after the bubble popped.
Shares have woefully underperformed the market:
ACLS Total Return Price data by YCharts
I think that can change, but it's unclear how much. I would be more confident if the company innovated to expand into new markets and create growth opportunities, but there's not enough to hang a hat on. Investors are probably better off on the sidelines, looking for alternatives with higher ceilings.
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Justin Pope has no position in any of the stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.
