The electric vehicle (EV) industry in the U.S. has hit a bump in the road in 2024, with growth slowing to just 10% due to high prices and interest rates, compounded by challenges faced by Tesla. In contrast, Europe and China have maintained strong growth rates of 21% and 32%, respectively, in the first few months of 2024. Amidst this landscape, Axcelis Technologies (NASDAQ: ACLS) emerges as a shining star, offering investors a compelling opportunity in the semiconductor sector.
The Backbone of Energy Efficiency: Power Chips Take the Center Stage
A new secular growth market has taken shape, revolving around next-gen semiconductors that prioritize energy efficiency by minimizing heat loss and supporting high voltages. These chips play a vital role in powering various technologies such as wind and solar systems, electric motors, EVs, and AI servers. While EVs have been the poster child of this trend, the true heroes have been the power chips driving efficiency gains. Axcelis Technologies is a key player in this arena, producing ion implantation machines that facilitate the manufacturing of energy-efficient chips. These chips, including silicon carbide (SiC) chips increasingly used in EVs, are crucial components in advancing power infrastructure across industries.
Competing in this space is semiconductor equipment giant Applied Materials (NASDAQ: AMAT), which acquired ion implant specialist Varian Semiconductor Equipment Associates in 2011. Both Applied and Axcelis witnessed robust growth in 2023 driven by high demand for equipment in EVs and advanced power applications. However, a slowdown in 2024 is expected to persist at least until summer before picking up again.
Data by YCharts.
An Undervalued Gem Ready to Shine
While Applied Materials has seen consistent growth, Axcelis’ revenue tends to be more volatile, leading to a decline in its stock price. Despite a 1% drop in sales year over year to $243 million in the first quarter of 2024, Axcelis experienced a 10% increase in earnings per share (EPS) to $1.57. However, the cyclical downturn is expected to intensify in the second quarter, with sales forecasted to plummet by nearly 11% to $245 million and EPS to decrease by 9% compared to the previous year.
The semiconductor industry, particularly those involved in power chips and automotive supplies, anticipates a growth resurgence by the end of 2024. Axcelis, with $530 million in cash and short-term investments, is strategically positioning itself for future opportunities by hinting at an acquisition to enhance its equipment portfolio.
Trading at 15 times trailing-12-month EPS and 25 times free cash flow, Axcelis is a small player facing stiff competition. The cyclical nature of its sales, coupled with the uncertain timing of the next growth cycle, justifies its current valuation. However, for investors seeking long-term potential in the EV and power infrastructure sector, Axcelis Technologies presents an intriguing value proposition.
Unlocking the Potential: Is Axcelis Technologies a Hidden Gem?
Before diving into Axcelis Technologies, it’s essential to weigh your options:
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