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Amkor Technology: Strong Position In Semiconductor Supply Chain Offers Resilience

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Investment Hypothesis

Amkor Technology, Inc.'s (NASDAQ:AMKR) way grounds of outperforming nan semiconductor markets successful 2022 should proceed successful 2023, arsenic nan institution is well-positioned to turn astatine much than nan manufacture rate. Growth from nan automotive electronics market owed to nan proliferation of driver assistance electronics, infotainment and telematics will thief nan institution turn successful 2023.

As a portion of TSMC's 3D Fabric Alliance, nan institution will navigate its proviso concatenation challenges by moving pinch different proviso concatenation leaders to accelerate nan invention of next-generation, high-performance solutions for its customers. At nan existent P/E aggregate of 8.8x, Amkor Technology, Inc. banal is trading astatine a discount, fixed nan company's exertion portfolio, scale, world footprint, and way grounds to outgrow nan markets. Thus, investors holding Amkor Technology should proceed to clasp nan stock. It besides is simply a bully clip to bargain nan banal for caller investors that do not person Amkor Technology, Inc. successful their portfolio.

About Amkor Technology

Amkor Technology, Inc., headquartered successful Tempe, Arizona, and incorporated successful 1968, is simply a starring semiconductor packaging and trial services supplier and a world leader successful nan Outsourced Semiconductor Assembly and Test (OSAT) industry. In addition, nan institution provides Design Services, Package characterization and Wafer bumping. Further, Amkor is an industry leader successful processing and commercializing precocious packaging and trial technologies pinch precocious request successful nan smartphone market, automotive applications and user devices.

According to nan company, its strategy is to place opportunities successful precocious packaging and testing areas for automotive and business end-market customers that tin make a speedy return connected investment.

We typically look for opportunities successful nan precocious packaging and trial areas wherever we tin make reasonably speedy returns connected investments made for customers seeking leading-edge technologies. We besides attraction connected processing a 2nd activity of customers to capable nan disposable capacity erstwhile leading-edge customers modulation to newer packaging and trial instrumentality and platforms. In addition, we are seeking to adhd caller customers and deepen our engagement pinch existing customers. This includes an expanded accent connected nan automotive and business extremity market, wherever semiconductor contented continues to grow, and successful nan analog area for our mainstream wire-bond technologies.

Recently, Amkor launched nan Smart Manufacturing Initiative to leverage its Industry 4.0 expertise to present adjacent real-time information accuracy pinch maximum ratio for its customers.

Smart Manufacturing Initiative

Amkor Website

The company's capabilities successful Industry 4.0 rests connected employing autonomous machines that run pinch nary manual intervention, utilizing Big information analytics to supply insights into instrumentality performance, utilizing Industrial IoT to summation nan velocity of nan manufacturing process, utilizing Cloud computing for real-time information storage, protecting nan information done its Digital Rights Management solution and utilizing instrumentality learning to amended defects discovery that quality beings tin find it challenging to identify.

Revenue growth

Author Calculations

In nan past 10 years, Amkor's revenues grew astatine 9.9% CAGR, whereas successful nan past 5 years, nan company's revenues grew astatine 11% CAGR owed to nan increasing request for semiconductor packaging and testing services.

Gross, EBIT and Net margin

Author Calculations

The company's operating and nett margins person improved successful nan past 5 years owed to nan amended costs structure. However, nan institution reported a simplification successful gross separator successful 2022 from 20% to 18% owed to accrued worldly costs.

According to Megan Faust, Chief Financial Officer of Amkor,

We knowledgeable a merchandise operation displacement towards higher worldly contented products, specified arsenic precocious SiP, driven by nan outperformance successful our communications extremity market.

Asset turnover and Asset efficiency

Author Calculations

Though nan company's plus turnover has stabilized successful nan past 3 years, its plus ratio has decreased successful 2023 owed to nan world slowdown resulting successful inefficient usage of assets.

Cash Conversion Cycle

Author Calculations

The institution had a little plus ratio successful 2022 owed to accumulation inefficiencies, excess inventory, and slow postulation of accounts receivable. As a result, nan DSO has accrued from 66 days to 68 days successful 2022, while nan rate conversion rhythm has accrued from 41 days to 48 days successful 2022.

2022 results

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The institution reported its fourth 4th and full-year results for 2022 connected February 13th 2023. Its nett income successful Q4 2022 were $1.91 billion, up 11% year-on-year and nett income of $164 million. For 2022, nan institution recorded nett income of $7.09 billion, up 16% year-on-year, good supra nan semiconductor manufacture maturation complaint of debased azygous digits. In addition, it reported a gross profit of $1.33 cardinal and an operating income of $897 million.

According to Megan Faust, Chief Financial Officer of Amkor,

Our strategical attraction connected precocious packaging, our beardown position successful cardinal maturation markets and our wide geographic footprint yielded different twelvemonth of records and important accomplishments.

Capex

Author Calculations

The company's CapEx walk for nan full twelvemonth was $908 million, much than $125 cardinal successful 2021 to fortify its activity position successful nan high-growth markets of 5G, automotive, IoT and high-performance computing. Further, nan Capex separator has improved from 10.9% successful 2020 to 12.8% successful 2022.

OCF and FCF

Author Calculations

In 2022, nan institution generated $1.1 cardinal successful rate from operations. Despite nan summation successful CapEx, nan institution generated $194 cardinal successful free rate flow. In nan agelong run, nan institution wants to return 40-50% of its free rate flows to its shareholders arsenic dividends and stock buybacks.

Financial leverage

Author Calculations

The institution has an fantabulous financial position pinch full indebtedness successful 2022 of $1.2 billion, a debt-to-EBITDA ratio of 0.8x and full rate reserves of $1.9 billion. In addition, nan liking sum ratio of 15.9x indicates that nan institution is amended capable to meet its liking obligations and is astatine a little financial consequence pinch a amended in installments standing giving it a higher borrowing capacity.

According to Giel Rutten, Amkor's president and main executive officer.

2022 was different fantabulous twelvemonth for Amkor. We achieved a grounds gross of $7.1 cardinal and a grounds EPS of $3.11. In addition, each extremity markets group caller grounds gross levels for nan year, resulting successful important outperformance compared to nan semiconductor market. Amkor's strategical attraction connected precocious packaging, geographic diversity, and manufacture megatrends positions america good to proceed to outperform nan semiconductor manufacture done this cycle.

Operating Drivers

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The company's income from nan apical 10 customers person not changed much, pinch Amkor getting 65% of revenues from its apical 10 customers successful 2022.

2022 End markets

Amkor Investor Presentation

The communications conception continues to beryllium nan biggest gross driver, contributing 44% of its full revenues. It has grown by 23% complete nan past twelvemonth and has a beardown position astatine nan precocious extremity of nan market, some successful nan iOS and Android segments. In addition, nan institution saw a steep maturation successful high-power silicon carbide solutions for electrical vehicles, requiring unsocial manufacturing technology. Thus, nan company's Automotive and Industrial segments grew by 14% from 2022 to 2021. In nan future, nan institution expects its revenues from automotive electronics to summation owed to nan higher electrification of vehicles.

According to Giel Rutten, Amkor's president and main executive officer.

Resilience successful nan automotive and business markets and higher-than-expected premium-tier smartphone request offset weakening request successful different markets. In nan automotive and business markets, we group a caller quarterly gross grounds driven by request for precocious packaging and infotainment systems.

Finally, Amkor's user business accrued by 3% successful 2022 against 2021 and represented 20% of its revenues, providing a wide portfolio of solutions for IoT wearables and much accepted user products.

According to Giel Rutten, Amkor's president and main executive officer.

Although full smartphone units were down astir 10% successful 2022, 5G units accrued by astir 20%. Semiconductor contented and premium tier 5G phones proceed to increase, and ongoing innovation, improved performance, and added functionality.

Advanced Packaging services lend 87% of nan company's revenues, followed by Testing services, which lend 13%. The revenues from precocious packaging grew 22% for nan twelvemonth and accounted for 76% of nan company's revenue.

According to Giel Rutten, Amkor's president and main executive officer.

Solutions utilizing our precocious SiP for camera and RF applications and package-on-package flip spot exertion for app processes and modems drove astir of nan maturation successful 2022. Amkor holds a activity position successful these markets, build connected exertion expertise and a beardown way grounds arsenic a trusted partner for innovative solutions and operational excellence.

In addition, nan institution is strategically expanding its capacity and exertion guidelines for automotive solutions in Europe, Japan and Korea to support location proviso chains for captious automotive semiconductors.

ROIC, ROA and ROE

Author Calculations

The company's ROIC, ROA and ROE person improved successful nan past 2 years. However, they showed a flimsy dip successful 2022 owed to nan higher Cost of earthy materials and a slowing system resulting successful weaker maturation successful nan user electronics segment.

P/E and P/BV

Author Calculations

Due to nan slower maturation successful 2022, nan company's P/E ratio has dipped from 11x to 8.6x, arsenic investors person accounted for slower maturation successful 2023 owed to nan world slowdown.

5 twelvemonth value returns

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However, nan institution has fixed fantabulous returns to its shareholders successful nan past 5 years, generating 164.38% against nan S&P 500 (SP500) returns of 50.5%, efficaciously giving much than 3x returns of nan S&P 500 index.

Amkor's Forecast for 2023

Amkor is expanding its footprint to Vietnam and has invested $1.6 cardinal successful 2021 to create a manufacturing and assembly works successful nan bluish business state of Bac Ninh. The mill will support early customer request and commencement high-volume manufacturing successful precocious 2023. Further, nan institution has strengthened its increasing European automotive proviso concatenation done its Portugal factory, wherever nan institution is expanding its exertion offerings for MEMS, wafer-level fan-out, flip spot and powerfulness Solutions.

Q1 2023 Forecast

Amkor Investor Deck

In 2023, nan institution anticipates a challenging macroeconomic environment, and frankincense expects request to soften beyond nan already anemic individual computers and low-end smartphone market.

According to nan Giel Rutten, CEO of Amkor:

Current marketplace forecasts bespeak that nan semiconductor marketplace will diminution by mid-single-digit percentages successful 2023. We judge nan manufacture is already taking measures to trim excess inventory successful nan PC and smartphone marketplace to return to a much balanced proviso concatenation successful nan 2nd half of 2023.

The metallic lining for nan institution is that nan automotive marketplace appears much resilient and expects to turn successful 2023. In addition, nan institution has established automotive manufacturing lines successful strategical locations and has received nickname from starring automotive OEMs for its reliability and quality, serving it arsenic a differentiator against its competitors.

Amkor has fixed a first-quarter gross guidance of $1.45 billion, representing a year-on-year diminution of 9% owed to nan challenges successful nan PC/Smartphone market, user wearables and computing markets. In addition, nan institution intends to trim its CapEx successful 2023 to $800 million, astir 45% of that is geared towards our accommodation description .

Risks

According to nan company, nan semiconductor manufacture will diminution by mid-single-digit percentages successful 2023, but if it extends to 2024, it will impact Amkor's valuation.

Amkor Technology, Inc. relies connected a analyzable world proviso concatenation for its earthy materials and manufacturing operations. Therefore, immoderate disruption aliases hold successful nan proviso concatenation owed to geopolitical situations for illustration nan Russia - Ukraine warfare tin consequence successful a higher costs of earthy materials that will impact Amkor's gross margins and effect its financial performance.

Further, Amkor Technology's vulnerability to rate fluctuations tin impact its gross and profitability arsenic nan worth of nan U.S. dollar strengthens comparative to different currencies.

Valuation

Before I worth Amkor Technology utilizing a Discounted Cash Flow ("DCF") model, I will analyse Amkor's position compared to its competitors by benchmarking nan institution against its competition.

First, I look astatine nan Economic Value Added of Amkor Technology to measurement nan company's economical profitability by taking into relationship its costs of superior and nan magnitude of worth that a institution has created aliases destroyed by comparing nan return connected finance to nan costs of that capital.

EVA

Author Calculations

For 2022, I get astatine $117.5 cardinal arsenic Economic worth added for nan company, indicating that it has generated much worth than nan Cost of its capital, which is simply a bully motion for investors.

I place nan pursuing companies for my analysis:

  1. Micron Technology (MU)
  2. ASE Technology Holding (ASX)
  3. Kulicke and Soffa Industries (KLIC)
  4. MKS Instruments (MKSI)
  5. Axcelis Technologies (ACLS)
  6. Onto Innovation (ONTO).

Revenue maturation successful past 5 years

Author Calculations

Though Amkor had an awesome gross maturation of 11% CAGR successful nan past 5 years, it still ranks beneath its competitors, implying that location is simply a imaginable for nan institution to turn much than nan existent rate.

Margin profile

Author Calculations

Amkor has nan lowest gross separator among its peers. Though nan institution attributes nan little gross separator owed to a slowdown successful nan system and higher costs of materials, nan institution operates successful a high-volume conception pinch debased pricing power. Therefore, to support its marketplace share, Amkor reduces prices to stay competitive, negatively impacting its gross margin.

Asset turnover

Author Calculations

As nan institution operates successful a precocious volume, and a debased premium segment, it has a higher plus turnover ratio. However, nan plus ratio has reduced this twelvemonth owed to nan higher earthy materials costs and a slowing economy. I presume that this simplification successful plus ratio is an outlier and will rebound erstwhile nan system recovers successful nan 2nd half of 2023.

Cash conversion cycle

Author Calculations

The institution has a debased rate conversion rhythm compared to its peers, implying that it tin make rate quickly, amended liquidity, summation profitability, amended creditworthiness, and show that nan institution is bully successful inventory management.

Return and FCF metrics

Author Calculations

The institution has a comparatively amended ROIC and ROA against its competitors arsenic it generates much profit from nan superior and assets it has invested in, resulting successful accrued net and amended financial performance. However, location is simply a scope for nan institution to amended nan free rate travel separator by reducing earthy worldly costs, managing superior expenditures and improving its moving superior management.

P/E and EV/EBITDA

Author Calculations

The institution trades astatine a little P/E and EV/EBITDA aggregate against its peers contempt fantabulous capacity successful nan past 5 years. Thus, location is simply a higher imaginable for rerating its aggregate successful nan future.

I do a comparable valuation, benchmarking nan institution against its peers connected nan P/E metric to understand whether it trades astatine a discount aliases a premium.

P/E

Author Calculations

First, I look astatine nan company's equity worth and P/E multiples successful nan past 5 years and benchmark it against its peers. Then, I presume nan company's nett income will trim successful 2023 from $766 to $700 cardinal but will rebound to $800 cardinal and $850 cardinal successful 2024 and 2025.

LTM P/E

Author Calculations

In nan past 3 years, nan company's nett income grew astatine 85% CAGR and 23.8% CAGR successful nan past 5 years. Its five-year mean nett separator was 6.6% but improved to 10.8% successful nan past 12 months. The median P/E ratio for nan manufacture is 24.9x, and I presume that astatine nan aggregate of 13.5x, nan company's implied worth is $42.1 giving it a 52.5% upside complete nan existent trading price.

Forward P/E

Author Calculations

For nan guardant P/E calculation, I presume that nan nett income will diminution adjacent twelvemonth to $700 cardinal but will rebound to $800 cardinal successful 2024. At 13x guardant P/E and 2024 nett income of $800 million, nan implied worth for nan institution is $42.45 giving it a 53.7% upside against nan existent trading price.

P/E valuation

Author Calculations

I mean nan implied value derived from LTM P/E and guardant P/E to get astatine nan value of $42.2 per stock for nan company.

For my DCF calculation, I presume nan following:

Revenues will turn astatine 15.5% CAGR for nan adjacent 5 years and 10.2% for nan adjacent 10 years, arsenic nan semiconductor packaging and testing manufacture is expected to turn astatine 10% successful nan coming years. As a result, Amkor will outgrow nan market.

The institution will support its EBIT separator for nan adjacent 10 years. The company's EBIT separator will stabilize astatine 12.5% complete 10 years contempt being successful nan cyclical manufacture and having a precocious dependence connected macroeconomic forces.

I presume nan institution will support its Sales/Invested superior astatine 1.84 arsenic it has an fantabulous way grounds of higher plus turnover. Further, its caller accommodation successful Vietnam will thief nan institution support its plus turnover.

The institution reported $149.5 cardinal successful R&D expenses. As R&D expenses make early economical benefits, I capitalize nan R&D expenses by amortizing them for 3 years.

Year R& D Expenses
-1 149.43
-2 166.04
-3 140.73

For each year, I adhd nan R&D expenses to nan operating income and deduct nan amortization expense. I adhd nan unamortized information of nan R&D expenses to nan balance sheet.

Year R&D Expense Unamortized portion Amortization this year
Current 149.43 1.00 149.43
-1 149.43 0.67 99.62 49.81
-2 166.04 0.33 55.35 55.35
-3 140.73 - - 46.91

I worth nan unamortized information of R&D expenses astatine $304.3 cardinal and nan full amortization astatine $152 million.

To get astatine nan Cost of capital, I presume nan 10-year US treasury enslaved complaint of 3.65% arsenic nan risk-free rate.

For equity consequence premium, I usage nan US ERP of 5.5%.

As nan institution operates successful nan semiconductor industry, I return nan bottom-up beta of 1.69, nan existent debt-to-capital ratio of 3.6%, and nan levered beta of 1.98.

I get nan company's Cost of equity arsenic 14.53% and nan Cost of indebtedness arsenic 3.6%.

Assigning nan marketplace weights of equity and indebtedness astatine 82.77% and 17.23%, nan company's WACC is 12.56%.

10 twelvemonth Valuation Model

Author Calculations

Estimating nan worth of growth Value/Share
Value of assets successful spot = 5,887.74 24.03
Value of unchangeable maturation = 237.69 0.97
Value of bonzer maturation = 3,614.25 14.75
Value of nan banal = 9,739.67 39.76

I get astatine nan company's endeavor worth astatine $39.76 per share.

Adding rate and subtracting debt, nan intrinsic equity worth of nan institution is $9.54 cardinal aliases $38.97 per share. As a result, nan institution is undervalued by 44%.

Amkor Technology looks charismatic astatine nan existent value connected comparables and Discounted Cash travel valuation.

I reason my study by stating that contempt nan challenging macroeconomic conditions successful 2023 and debased guidance for Q1 2023, nan institution will retrieve to its expected maturation successful nan 2nd half of 2023. Moreover, arsenic a semipermanent investor, I judge that Amkor Technology, Inc.'s spot successful precocious packaging technology, wide geographic footprint and beardown beingness successful increasing automotive electronics markets will thief it to outgrow nan semiconductor marketplace successful nan future.

This article was written by

Ramkumar Raja Chidambaram floor plan picture

Ramkumar Raja Chidambaram is simply a seasoned M&A master passionate astir nan financial markets. With 15+ years of acquisition successful analyzing stocks and bonds, Ramkumar has developed a beardown knowing of nan cardinal drivers of marketplace performance. His expertise lies successful conducting in-depth marketplace research, analyzing economical trends, and evaluating institution performance. He has a beardown way grounds of delivering insightful and actionable finance recommendations to clients backed by information and rigorous analysis. Ramkumar's expertise spans aggregate sectors, including technology, healthcare, and energy. Through his articles connected Seeking Alpha, Ramkumar intends to stock his insights and supply actionable finance proposal to thief individuals make informed decisions. In addition, he intends to thief readers understand nan markets and make informed decisions that will lead to semipermanent success. If you are willing successful staying up-to-date pinch nan latest marketplace trends and finance strategies, Ramkumar invites you to travel his articles connected Seeking Alpha.

Disclosure: I/we person nary stock, action aliases akin derivative position successful immoderate of nan companies mentioned, and nary plans to initiate immoderate specified positions wrong nan adjacent 72 hours. I wrote this article myself, and it expresses my ain opinions. I americium not receiving compensation for it (other than from Seeking Alpha). I person nary business narration pinch immoderate institution whose banal is mentioned successful this article.

Editor: Naga



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