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Amkor (AMKR) Retains Competitive Edge Despite Inherent Risks

Zacks Equity Research
Updated

On Jan 5, we issued an updated research report on technology firm, Amkor Technology AMKR.

Amkor Technology is one of the largest providers of semiconductor packaging and test services. It packages and tests integrated circuits (ICs) for chip manufacturers, fabless semiconductor companies and contract foundries.

Growth Drivers

Amkor has a well-diversified product portfolio, which will continue to drive Amkor’s revenue base. The most important among these is the growing demand for mobile devices. Amkor has been increasing its share in the mobile communications market. The rapid migration of features such as fingerprint sensors from the high-end into the mid range is a big positive. The company is also expanding its customer base with a particular focus on Greater China. The company’s strong market position and customer relationships in China are long-term drivers of its business. In the last reported third quarter, Amkor’s revenues of $1.14 billion increased 14.8% sequentially and 4.5% year over year.

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Amkor’s focus to channelize its resources in important growth areas like automotive is very encouraging. The increasing percentage of auto sales will lend stability to the business and offset any weakness in the more volatile consumer market (mainly mobile). Additionally, this is a higher-margin business and Amkor is witnessing an increasing number of design wins, which could mean stronger and more stable margins going forward. As per market forecasts, automotive market will grow in high single digit in the coming years. The growth is expected to be driven by increasing electronic content. Given its attractive value proposition for automotive customers, the company is poised to benefit from it.

Amkor is quite active on the acquisition front. Last year, the company completed the acquisitions of J-Devices Corp and Europe's largest OSATS (Outsourced Semiconductor Assembly and Test Services) company Nanium S.A. These acquisitions are expected to strengthen Amkor’s product technology expertise and boost recurring revenues, going forward.

Management is focused on improving gross and operating margins. The company is making efforts to improve its existing portfolio and acquire businesses over time that will aid its top and bottom-line trajectory. The company has also taken various restructuring activities which will help the company to lower the cost structure, leading to relatively steady gross margins.

Positive Earnings Surprise History: Amkor has an impressive earnings surprise history. The company outpaced the Zacks Consensus Estimate in three of the trailing four quarters, delivering an average positive earnings surprise of 17.6%.

Headwinds

Notably, Amkor has underperformed the industry on a 12-month basis. Shares of the company have gained approximately 4% compared with the industry’s growth of nearly 37% in the same time period.

The company has a high fixed cost structure. Therefore, margins suffer a lot when sales fall. On the other hand, the structure is necessary to support an increase in demand. Additionally, Amkor has to spend a considerable amount of money on R&D to maintain its edge in innovation and recover margins that are high enough to continue this spend. Therefore, R&D expense has been increasing considerably over the years, impacting its bottom-line growth.

Furthermore, though acquisitions are a part of Amkor’s growth strategy, unsuccessful execution and integration of new buyouts and an increase in acquisition costs due to stiff competition is likely to negatively impact its sales/margin performance.

Amkor Technology, Inc. Price and Consensus

 

Amkor Technology, Inc. Price and Consensus | Amkor Technology, Inc. Quote

Zacks Rank & Stocks to Consider

Amkor currently carries a Zacks Rank #3 (Hold). A few better-ranked stocks in the broader technology sector are Applied Materials, Inc. AMAT, PetMed Express, Inc. PETS, and SMART Global Holdings, Inc. SGH, each sporting a Zacks Rank #1 (Strong Buy). You can see the complete list of today’s Zacks #1 Rank stocks here.

Long-term earnings growth rate for Applied Materials, PetMed Express and SMART Global Holdings is projected to be 12.7%, 10% and 15%, respectively.

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