Revenue and profits have boomed the last few years, but that boom is now over, right? The markets done a pretty good job of sniffing this one out. Stock price peaked about six to nine months ago and it's been fairly steadily down ever since. Hey, everyone, welcome back to Chip Stock Investor.
Today, we're going to be talking about a company that we've looked at a few times in the past six to nine months, but have always passed on it. Axcelis Technologies. It's time to take a deep dive into this one. Yeah, time indeed to do it, especially with the downturn brewing for automotive and industrial chips. So Axcelis is getting hit by this.
Before we dive into it though, Kasey, quick plug here for our brand new Discord channel. It's just a few weeks old now. We know everybody wants to know about Nvidia stock. So NVIDIA reports earnings Wednesday evening. Thursday morning, 6 A. M.
Pacific time, 9 A. M. East coast time. We'll be doing a live Q and a about NVIDIA over on the Discord channel. So check that out.
If you want to be a member of our Discord community, you can join our membership here on YouTube or over on our Kofi page, you can find both of those links in the description. Okay. Let's talk about Axcelis Technologies. And we'll start by looking at our semiconductor industry flowchart. Axcelis Technologies fits into this fab equipment, critical part of the industry, this choke point of the industry.
There's no getting around a business like Axcelis or some of its peers like Applied Materials when you want to manufacture semiconductors. And we're going to focus on one part of the semiconductor manufacturing process that specializes in, ion implantation. Yeah, that's right. Jumping to another slide, this one we did not create, but we're going to keep using it because it's good stuff supplied by Applied Materials. Now when we talk about ion implantation, you can see this little skinny, tiny wedge here indicating this is definitely a niche within the WaferFab equipment space.
Ion Implantation, dominated by Applied Materials, at least in terms of revenue, you can see that little blue part of the bar. But what about this gray part? Well, that's primarily Axcelis Technologies, it's share of ion implantation. Ion Implantation is a market that has roughly doubled over the last few years. And as far as addressable market segment breakdown, Axcelis provides this slide. Power devices in particular, about just over a third of the semiconductor manufacturing process that uses ion implantation. General mature node manufacturing and image sensors.
So in total power and sensors and other mature type semiconductors, make up the bulk of this with memory and advanced logic, a small but growing portion of ion implantation. And Kasey, maybe we should talk about what this is in the first place, right? What is ion implantation? Why is it important? Ion implantation is a type of doping. Now, that's not a negative term here when we're talking about semiconductor manufacturing. No drug jokes. No drug jokes.
No. Now when you think about silicon, it is not a conductive material. They have to add additional elements to make it conductive.
Common substances that are added to the base material to make it conductive can include arsenic, phosphorus, boron, indium, germanium, nitrogen, hydrogen, and helium. We've talked about many of those elements in past videos with certain companies. So you may recognize them. Yeah. Helium, like Air Products and Chemicals, for example.
At any rate, just continuing on this Kasey, ion implantation is specifically when this non silicon material is ionized, that's to say it's electrically charged. And it's done by turning it into plasma. And if you think back to chemistry class, what is plasma oftentimes referred to as the fourth elemental state. Plasma is a superheated matter and it's heated to a point where the electrons are ripped away from the atom itself, leaving that ionized gas behind.
And so this ionized gas, this plasma, is beamed into the silicon substrate, the energy level of that ionized beam. How fast it's accelerated, the angle that it's shot at the substrate will determine how far those ionized molecules, that plasma gets embedded into the silicon substrate. We have this nice little brief animation actually provided by Axcelis is showing a few simple steps of how this might work. So it could actually happen to the wafer itself, the raw wafer, silicon wafer, or it could happen after the lithography and deposition and etch steps, handled by companies like ASML, Applied Materials, Tokyo Electron and Lam Research. So maybe you already have the transistors crafted on the wafer and you can then dope those transistors as well, using an ion implantation machine.
And there's some damage caused to the wafer after this ionizing beam rips over the top of it, right? So the substrate needs then to be repaired. And so that process is done with thermal heating called annealing. And that's where the wafer is quickly heated and then allowed to cool in a controlled process that repairs the crystal lattice structure of the substrate.
Yeah. And maybe this term annealing or anneal sounds familiar. This is common practice in, in metalworking.
Like for example, maybe making a copper piping, and anytime you bend a metal, on the molecular level, the structure has been weakened whenever it undergoes stress like that. And so annealing is where you heat it up and then control the cooling to kind of repair that structure. Kasey, this is an interesting bit here because you can see again, if we just refer back to our slide, that we just used. You can see right next to the implant segment, there's that other bar, thermal, where Applied Materials and Tokyo Electron have a dominant share of the thermal process.
Is this something that Axcelis does as well? Because it seems like the two steps go hand in hand, ion implant step, doping and then the annealing. So Axcelis used to provide the thermal machines, but it doesn't seem to advertise them anymore on their website. It doesn't mention the words thermal, anneal, or annealing in their annual report in 2023. We conclude that at least at this point, it's not a big enough market share to mention in their annual report. Applied Materials, on the other hand, does both ion implant and thermal annealing. Yeah.
So for Axcelis, it's Purion family of machines has been its focus now for well over a decade. They provide this little, rough chronological chart showing all of the different Purion machines that they've developed, over the last 12 or so years, and of course, when we're talking about power chips, like we showed that addressable market earlier, we're going to talk about silicon carbide. So instead of just a raw silicon wafer, silicon carbide, which is a compound semiconductor using silicon and carbon combined, the adoption of that has accelerated in the last few years, especially from EV market growth. And ion implantation is an important part of silicon carbide or SiC wafer manufacturing. This is a large part of why Axcelis' revenue and profits have boomed the last few years, but that boom is now over, right? The markets done a pretty good job of sniffing this one out.
Stock price peaked about six to nine months ago. And it's been fairly steadily down ever since. And it looks like that is because Q4 2023 will in fact be the short term peak for profit and sales.
You can see in the outlook, there's $310 million in Q4, and it's expected to dip to $242 million in Q1 of 2024, which is a 5 percent year over year decrease. And then earnings per share of $2 and 15 cents in Q4 will drop to an expected $1 and 22 cents, which is a 15 percent year over year decrease. And that's back to where it was in Q1 of 2022. Yeah, so Kasey, the big question here is the party over for these power chips and mature manufacturing processes? So I think we need to pivot here to the earnings call where management, of course, doubled down on its long term financial goals. So CEO Russell Low said that the general mature manufacturing process is expected to be slower the first half of 2024. Read into that, lower than it was the first half of 2023, before improving in the second half of the year, dependent on economic conditions, which I think is probably a pretty important little, add on to that sentence.
At any rate, this does make sense because what Low is saying here is essentially what everybody else involved in the chip manufacturing space, especially for power and mature manufacturing processes, has been saying. The first half of this year is going to be down before a gradual recovery kicks in the second half of the year. This really makes sense given how collaborative the semiconductor industry is, as a whole. Long term planning of projects is an absolute necessity to control costs. And these machines are very complex and expensive to manufacture. So this can give Axcelis a very good insight into what's coming down the pike.
Yeah, maybe we can just highlight two of those things coming down the pike. The first mentioned on the last earnings call was, ongoing research and development around those SiC, those silicon carbide, wafers. Axcelis has shipped a few of its Purion H 200, some of its latest and greatest systems, as you can see on that product development, roadmap.
And a lot of customers are still trying to get the ingredients right for their silicon carbide devices. EVs are still a very new market. A lot of the other use cases for silicon carbide, like next gen, power, it's just new technology. And whenever you have new technology, it tends to be expensive. And after you start ramping up production, you begin to focus on, okay, how do we get more efficient at manufacturing these things? How do we get our cost of production down? And so some of Axcelis' customers using these Purion H 200 machines during this current slowdown in the market to work on that ingredient and process to try to help their future profitability. Axcelis thinks that this bodes well for them because if a customer's buying these machines for R& D, they might buy more of them later on when they take another leg up and ramp up their production again.
Yeah, that makes a lot of sense. Japan has been making some moves to do more on shoring or friend shoring of chip manufacturing and diversify global supply chains out of Taiwan. And we'll talk about this more with Renesas and Tokyo Electron.
But for now, Axcelis is on to something with its new Dragon system for advanced logic. In 2023, Axcelis mentioned that they shipped a Purion Dragon, which is their most advanced high current implanter to a leading research institute focused on advanced process development in Japan. They also have another Purion Dragon under evaluation with another advanced logic customer. They said that they've seen this initial success in the power market due to the strength of their device in Japan. Yeah.
And as you may know, folks watching this video in Japan, definitely know, Japan working on building that brand new, state of the art fab, eyeing two nanometer, process technology. That's going to be logic chips. Also attracting some investment from, Taiwan Semiconductor Manufacturing as well. Lots of initiatives going on over there. Japan could be a big winner and it looks like Axcelis is maybe helping facilitate, some of that manufacturing capacity increase over there in the land of the rising sun. So I think let's get back to the numbers Kasey, because.
What we need to know is what does this mean for 2024? And as we teased in the title of this video, is this a semiconductor stock we should just walk away from and then take a look at when 2025 gets rolling here in about 10, 11 months. The CEO, Russell Low said Axcelis will return to healthy growth in the mature and memory markets. This combined with continued strength in the power segment is expected to drive Axcelis to our $1. 3 billion revenue model in 2025. Axcelis expects revenue to be flat in 2024, coming in around that $1.
1 billion like it did in 2023. But if management is correct, a 13 percent increase in sales could be the baseline expectation for 2025. So ultimately we do need to answer that question. Is Axcelis is something that we need to look at in 2024 and make a decision now or should we just wait? Okay. Well, let's do a little bit more digging here.
Flat growth is not very exciting this year. $1. 3 billion next year in 2025, that's 13 percent growth.
Still not setting the world on fire. So just from that top line point of view, this is one we continue to pass on. However, let's refer back to the original long term guidance, and take a look at this because more than just the revenue growth. If Axcelis hits its targets, management expects, it's going to achieve some very significant operating leverage. Their free cashflow margin last year was just about 12%. But if they hit $1.
3 billion in revenue next year, they think that their free cashflow margin is going to be approximately 25%, so just over double what it was last year. So based on this assumption, Axcelis stock could be trading for a pretty cheap valuation based on those 2025 numbers, right? Yeah. Based on those 2025 numbers, it's trading about 11 times to 12 times free cash flow for 2025. And that's assuming a market cap of $3. 8 billion and sales of $1.
3 billion times that 25 percent free cash flow margin. And Axcelis has a squeaky clean balance sheet. They have $506 million in cash and short term investments and zero debt. Yeah, so ultimately, Kasey, I think what we're looking at here, maybe just drawing comparisons again, back to Applied Materials.
Maybe it's not fair to call this a baby AMAT stock, but based on what we're seeing here, this could be akin to buying Applied Materials in late 2022. We were kind of pounding the table on that one end of that year and into early 2023 because of, not the growth, but the big boom in free cashflow, which is exactly what happened. And, you can take a look at the Applied Materials chart and see what happened to the stock since then.
It's been pretty good. Market highly pleased with the free cash flow generation in the last year and a half. So is this what is brewing for Axcelis Technologies? Maybe.
We think there's a decent chance, decent statistical chance that this is the eventuality for this company. And again, strong balance sheet. They have been pretty open about saying that mergers and acquisitions are something they're exploring to leverage their financial strength. So maybe this is a more diversified company five years from now.
Maybe it's not just a specialist focused solely on ion implantation. Maybe it is a baby Applied Materials. We'll have to see.
Ultimately, Axcelis management is kind of in prove it stages right now, especially with cost controls, if the revenue does come back in the back half of 2024. And Nick, you mentioned one key risk that we need to watch here, what is that? Yeah, and this is a common question that we get and it's a very valid one. Obviously it's not one that's too concerning, otherwise the entire semiconductor industry would be uninvestable, but exposure to the market in China. Some companies have more, some have less, the whole industry though, relies on about one third of its ultimate sales to China, but for Axcelis, it was 46 percent last year. And for 2024, the outlook is a pretty wide range of 40 percent to 60 percent of sales expected to come from China.
Again, this is similar to some other companies, some other favorites in this space, including Applied Materials. Even lithography leader, ASML Holding scooped up a lot of sales at the tail end of 2023, as some of the upstart fabs in China, were buying as many DUV, deep ultraviolet litho machines as they could before new export sanctions kicked in. So Axcelis is in the same boat. At this point, the outlook is that China's fab equipment purchasing is going to be stable, in 2024. It's not going to decline, at least not for the full year outlook.
But this is definitely something to monitor as we head into 2025, because at 40 percent plus of revenue, obviously China and it's purchasing of these ion implant machines, is a key part of the growth outlook. So we got to watch that and see if, you know, is this trend going to continue or is there any weakness in the market in China that maybe causes Axcelis and peers to miss their growth targets. Ultimately we think that the manufacturing capacity is being added, especially over the next three years for semiconductor manufacturing. Axcelis does appear to be in good shape.
It's not just one step, one piece of equipment from one maker in the semiconductor manufacturing process. It takes a ton of different machines, such as ion implant machines to manufacture these products. Ultimately, we don't think this doping via ion implant party is over quite yet.
Thinking about adding Axcelis to our portfolio, by our internal definitions, we view this more as a small cap stock. So the standard small cap rules for us apply. It would be a very small position and will become a part of our basket of small caps, which is about two dozen stocks. And ultimately small caps may have a greater magnitude of price appreciation potential, but it also has a very high probability of underperforming the market over long stretches of time. So diversification is key when it comes to small cap companies.
That's right. If you want statistics to work in your favor, you can't just invest in two or three small caps and hope they turn you into a millionaire. You might get lucky, but more than likely you're not going to get lucky. Sorry, folks, these are just the facts.
This is the statistics part of investing. And that's our belief we're sticking to it. So after analyzing this a number of times over the last year, talking about it off and on for the last six or nine months. In summation, we think Axcelis Technologies looks attractive based on the 2025 goals, the mileposts that management is trying to home in on.
So we're going to be eyeing a small position within the next couple of months. But we're definitely going to leave some room to add again later in the year, later in 2024, if there's some further stock price volatility. So we want a little cash leftover and we want to keep it a small position so that we're comfortable adding again before the end of 2024, not waiting until 2025 on this one.
And this is contrarian, but you've probably noticed this theme before if you've been following semiconductors for at least the last couple of years with us, that these things do tend to rally in the midst of a downturn. The stock doesn't wait to rally until the downturn ends and a new growth cycle begins, it happens before. So we're being contrarian here, we're assuming that the story plays out as predicted, and we'll be looking to add some Axcelis stock to our portfolio within the next couple of months, small position. All right, that is a wrap on Axcelis Technologies.
Make sure you have subscribed to the channel if you have not already, and that you have notifications turned on. And once again, on Thursday, after NVIDIA Earnings, we will have our live Q&A session with Nick and I on our Discord channel. If you would like to join the membership here on YouTube, or over on our Ko fi page, so you can have access to Discord where we talk all things stocks, make sure you check out the link in our description. Everyone have a great day and we'll see you again very soon at Chip Stock Investor.
2024-02-25