Axcelis Technologies, Inc. is an American company that designs, manufactures, and services ion implantation and other processing equipment used in the fabrication of semiconductor chips. The ion implantation business constitutes a significant portion, representing 97.6% of the total revenue and the rest is derived from other services. Axcelis earns revenues globally, with 73% of earnings originating from the Asia Pacific region, 15% from the United States, and remaining 11% from Europe. By a focused strategy on ion implant, Axcelis has built a strong competitive position in addition to growing market share for mature semiconductor devices, which makes up for 80% of total system shipments out of which 39% is driven by electric automotive market.
In this case study, we will understand the industry in which Axcelis operates, compare it against other top companies of the sector, understand growth prospects, risks and finally I will provide my fair value for the company.
Industry overview
Semiconductor chips, also called integrated circuits, are crucial components found in a wide range of consumer and industrial products. These include personal computers, mobile devices, automobiles, sensors, controllers for the “Internet of Things” (IoT), and data storage servers. The demand for these chips is continuously rising due to factors like the electrification of vehicles, advancements in digital communications (such as 5G networks and IoT growth), and the increasing complexity of device features. These chips serve various purposes, from power management to data input (like image sensors) and memory for data storage, internet streaming, and cloud computing analytics.
Semiconductor chip manufacturers operate wafer fabrication facilities, often referred to as “fabs,” where integrated circuits are made using various types of equipment. This is where companies like Axcelis Technology come in, providing process equipment as part of a larger and intricate chain of manufacturing steps. As the demand for semiconductor chips grows, chip manufacturers will enhance and reinvest in their production processes and capacity, creating a need for equipment and services from companies like Axcelis.
The semiconductor equipment manufacturing industry is also quite competitive, with a limited number of participants of varying sizes. In the field of ion implantation, Axcelis primarily competes with Applied Materials for ion implantation equipment. But other notable companies in this industry space include KLAC Corporation, Lam Research, and ASML. I will be comparing Axcelis with all these companies for a more in-depth competitive analysis.
Competitive analysis
Let’s compare to the four major companies in the semiconductor manufacturing equipment space.
| Axcelis | Applied Materials | ASML | KLAC | Lam Research | |
| Market capitalization | 4.25B | 134.69B | 296.97B | 79.24B | 103.23B |
| Revenue | 1.09B | 26.52B | 28.28B | 10.17B | 15.84B |
| Revenue Growth (cagr) | 19.67% | 9.68% | 17.61% | 21.06% | 9.50% |
| Operating Margin | 23% | 29% | 31% | 38% | 30% |
| ROIC (with goodwill) | 38% | 34% | 24% | 39% | 38% |
| Sales-to-Capital ratio | 2.50 | 2.50 | 2.50 | 3 | 3 |
Applied Materials is a major player in semiconductor equipment manufacturing, boasting diversity across the entire materials processing stack, from creation to modification, removal, and analysis. Lam Research, much like Applied Materials, provides process equipment for multiple manufacturing stages, although it competes in only three out of the six major wafer front end (WFE) processes. Lam Research’s market share in deposition and etch processes has been steadily increasing. KLAC stands out as a dominant force in semiconductor process control, capturing a robust 58% market share for this critical function. In comparison, Applied Materials trails with a 12% market share. ASML, a Dutch company, specializes in producing photolithography systems crucial for etching circuit patterns into silicon wafers. As the sole producer of EUV (extreme ultraviolet) photolithography systems, ASML holds a monopoly, granting it significant pricing power.
In summary, Applied Materials is distinguished by its extensive product offerings and patents, while other companies specialize in specific niches, making them dominant in their respective process spaces.
Axcelis, although relatively smaller, boasts an impressive growth rate of 19.67%, securing its position as the second-fastest-growing company, just behind KLAC, which has grown at a 21% compounded annual rate over the last 5 years. This growth outpaces its direct competitor, Applied Materials, which is growing at a rate of 9.68%. The growth is notably fueled by the electrification of the automotive market. Despite having the lowest operating margin at 23% among the compared companies, this is attributed to a higher percentage of revenue allocated to sales and marketing. With increasing revenue, it is anticipated that sales and marketing expenses will represent a smaller portion, potentially leading to improved operating margins in the future.
Axcelis also claims the second-highest Return on Invested Capital (ROIC), closely following KLAC. The sales-to-capital ratio for all companies is consistently impressive, ranging from 2.50 to 3.00. These metrics position Axcelis as a formidable player with significant growth potential and promising financial performance in the semiconductor equipment industry.
Stock market performance
Axcelis has delivered remarkable stock performance, surpassing all other stocks with an impressive 628% return over the last 5 years. It has outperformed the Nasdaq by an impressive margin, exceeding it by almost 500%. The outstanding performance in the past year can be attributed to Axcelis’ substantial revenue growth of 39% and an impressive operating margin of 23%, marking a 30% increase from the previous year’s margin of 19%.
Although Axcelis stock experienced a significant drop from its 52-week high of approximately $200, it currently appears to be stabilizing around a support level of $129.
Growth prospects
The semiconductor equipment industry is susceptible to cyclical fluctuations in capital spending initiated by semiconductor chip manufacturers. This spending is influenced by factors such as the demand for semiconductors and products utilizing them, the utilization rate and capacity of existing semiconductor chip manufacturing facilities, and changes in semiconductor technology. According to a report by McKinsey, the semiconductor industry, as a whole, has experienced significant growth, with sales surpassing 20% and reaching approximately $600 billion in 2021. The report also suggests that the industry’s overall annual growth could average between 6 to 8 percent up to the year 2030. Focusing on specific sub-segments, approximately 70 percent of this growth is anticipated to be driven by three key industries: automotive, computation and data storage, and wireless.
Axcelis has particularly thrived due to the increased demand for semiconductors resulting from a notable shift towards electric cars.
Risk factors
Axcelis faces exposure to U.S. export controls, which could impact ability to sell to specific customers in China. China is a significant market in recent years. Since the inclusion of SMIC on the U.S. Entity List in 2020, Axcelis has been required to secure export control licenses to ship to mature process SMIC fabs. Another chipmaker, Yangtze Memory Technologies Co., Ltd. (“YMTC”), faced a similar fate in 2022, being added to the Entity List without a provision for licensed shipments.
A new regulatory framework for export controls was introduced by the U.S. in October 2022. This framework restricts all semiconductor equipment shipments to Chinese customers involved in the production or development of logic, DRAM, and NAND chips meeting specific advanced parameters. While these regulations have led to limitations on exports to certain Chinese customers, Axcelis is presently able to continue shipments to the majority of Chinese customers.
It’s important to note that, in general, sales to Chinese customers pose a higher risk compared to sales in other international locations due to trade tensions between the U.S. and Chinese governments. Here is revenue exposure to China for each of these companies:
| Revenue exposure to China | |
| Lam Research | 37% |
| Applied Materials | 31.7% |
| KLA Corporation | 25.11% |
| ASML | 13.8% |
| Axcelis Technologies | APAC region 73.6% (Taiwan, South Korea, Singapore, Japan and China) |
While Axcelis has not disclosed specific details regarding its engagement with China, given China’s prominence in the industry, it can be reasonably inferred that a substantial portion of Axcelis’ ion implantation revenues is linked to China. Consequently, the company’s future revenue growth and competitive position are likely influenced by the ongoing tensions between the U.S. and China.
Valuation
In a business-as-usual scenario, i.e. is able to obtain licenses to continue business with customers in China, Axcelis is poised to sustain growth at above industry average due to exposure to automotive industry. Furthermore, I expect that operating margins will see improvement, bringing them much closer to those of other companies in the industry.
Using a discounted cash flow model, my estimations are as follows: a growth rate of 8% for the next five years to reach a target revenue of $1.5 billion. After that, I will use perpetual growth rate of 3.91% (10-year treasury yield, as of writing this article) and operating margins stabilizing at 26%. Re-investment rate calculated at sale-to-capital ratio of 2.50 (based on historic re-investment rate of Axcelis).
According to my DCF valuation, Axcelis Technologies is undervalued by 17%. Axcelis’ value based on pricing is also cheaper compared to other companies in the sector with forward EV/NOPLAT ratio of 17.31 which is also below sector median ratio of 20.83.
| EV/NOPLAT FWD | |
| KLAC | 22.96 |
| ASML | 32.12 |
| Lam Research | 24.32 |
| Applied Materials | 21.20 |
| Axcelis Technologies | 17.31 |
NOPLAT – Net Operating Profit Less Adjusted Tax calculated as operating profit – average tax rate.
Conclusion
In summary, Axcelis is a robust company with a compelling product portfolio, operating in a lucrative yet fiercely competitive industry. The company exhibits a trend of growing margins and revenue. The recent decline in stock price over the past year presents an attractive buying opportunity.
However, it’s essential to acknowledge the tangible risk associated with the company’s exposure to China, which could impact future revenue growth. Despite this, the industry’s ability to navigate U.S.-China trade relations over the last 2-3 years provides optimism that Axcelis should also be equipped to handle such challenges in the future with minimal impact.
Disclaimer
The opinions expressed in the Blog are for general informational purposes only and are not intended to provide specific advice or recommendations for any individual or on any specific security or investment product. It is only intended to provide education about the financial industry. The views reflected in the commentary are subject to change at any time without notice.