Artificial intelligence (AI) is primarily deployed using centralized data centers, but it's slowly migrating to computers and smartphones, which could drive a productivity boom across the economy. None of that would be possible without the advanced semiconductors supplied by companies like Nvidia, Advanced Micro Devices, and Micron Technology.
Some smaller companies provide critical equipment and services to those chip giants, but they tend to get less attention from investors. Axcelis Technologies (NASDAQ: ACLS), for example, supplies chip manufacturers with ion implantation equipment critical to the fabrication process, and AI is already driving up demand for the company's products.
Axcelis stock is very cheap relative to its peers right now. Here's why it might be a great buy as the AI revolution gathers momentum.
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A unique way to invest in the AI revolution
Ion implantation is a necessary part of the fabrication process for central processing units (CPUs), memory chips, and power devices (which regulate electric power in high-current applications). The power device segment has been especially lucrative for Axcelis over the last couple of years, thanks to the electric vehicle industry, which constantly looks for ways to charge batteries more quickly and squeeze more miles out of every charge.
But data centers built for AI present a new opportunity in this space because they consume a lot of energy. Some of Axcelis' customers started using silicon carbide-based trench MOSFET (metal oxide semiconductor field effect transistor) power devices for their AI infrastructure. The silicon carbide chemistry is more heat-efficient and robust under heavy workloads than the traditional silicon chemistry, but it's more implant-intensive, which creates a direct tailwind for Axcelis' business.
AI chips also present a growing opportunity for Axcelis. Many data center graphics processing units (GPUs) designed by Nvidia come with built-in memory, which requires ion implantation. Plus, computers and devices require increasing dynamic random access memory (DRAM) capacity to run AI software, so manufacturers might have to expand their production facilities, which creates organic demand for Axcelis' equipment.
Preparing for a strong 2025
Axcelis delivered record revenue and earnings during 2023 -- far above its initial expectations -- so topping those results in 2024 was always going to be a challenge.
Axcelis generated $256.5 million in revenue during the second quarter of 2024 (ended June 30). While that crushed management's forecast of $245 million, it still represented a 6.3% drop from the same quarter in 2023. Wall Street expects the company to deliver a little over $1 billion in total revenue for the whole of 2024, a marginal decline from last year.
However, Axcelis' guidance suggests it could return to growth in 2025, with $1.3 billion in revenue, representing a 24% year-over-year jump. The company currently has an order backlog worth over $1 billion, which supports the expectation for a strong result in 2025.
Plus, Axcelis has already started building inventory because it expects memory chip manufacturers to begin adding more capacity at the end of 2024 and into 2025. Moreover, the company expects the silicon carbide power device market to grow by 25% per year until 2029, thanks to demand for AI data centers and electric vehicles, which lays a foundation for steady revenue growth over the longer term.
Axcelis stock is cheap right now
Despite the slowdown in revenue, Axcelis is still highly profitable. It delivered $7.26 in trailing-12-month earnings per share, and btrades at a price-to-earnings (P/E) ratio of just 13.5.
That's a 42% discount to the S&P 500, which trades at a P/E ratio of 23.8. It's also substantially cheaper than the iShares Semiconductor ETF, which trades at a P/E ratio of 32.8. In other words, Axcelis stock would have to more than double just to trade in line with its peers in the chip sector.
The company's lack of growth is the primary reason its stock is trading at a heavily discounted valuation at the moment. To spark a recovery, it will have to prove to investors that it can deliver on its 2025 estimates. But if it's successful in doing so, investors who buy the stock today could earn a very nice return.
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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.
