Summary
ACMR is a BUY. ACMR has massive growth potential and is currently projected to grow at 40% year over year. This provides a great opportunity to have a multi bagger in the portfolio. The semiconductor industry is a great industry to be in and selling the machines that make the semiconductors is a great way to get exposure to that industry. The risks include this company is mainly exposed to China and will be volatile because it is a small cap stock.
Understanding ACMR as a Business
ACM Research develops and sells wet processing equipment for the semiconductor manufacturing industry. The company has produced equipment for a range of applications in IC manufacturing and wafer level packaging — with a special focus on cleaning technologies for advanced semiconductor devices.
Their customers are companies that manufacture chips such as HLC, and SMIC. These are two of China’s largest semiconductor foundries. Semiconductor manufacturing is one of the most complex, specialty manufacturing practices there is. There is a lot of room to make the industry simpler and easier for manufacturing.
Semiconductor manufacturing is one of the most in demand industries currently because of the artificial intelligence renaissance alongside cloud computing. This means that more companies will be expanding their production operations. This means more demand for ACMR products.
A moat they have is that semiconductor manufacturing is complex and they have skill and expertise. The more equipment they sell the more likely that customers will purchase more of their units. As they become standard equipment in the manufacturing practice then the more demand they will have.
A majority of their customers are Chinese manufacturers. China and the US are in a race to produce the most and most advanced chips so this will drive demand for ACMR. This is especially true with the US banning the sale of NVDA chips to China so China will need to make its own chips.
Valuation Metrics
The finviz stock screener is a great tool to see performance metrics that are important to assess a company’s valuation.
ACM research is valued at $978 million by market cap. The PE is only 15.98 and the forward PE is 13. The most important thing about this company is that it is projected to grow by 42% per year for the next few years. That is a great growth rate for a company especially only valued at a multiple of 15. A growth rate of 42% could justify a multiple around 40 instead of 15.
FAST Graphs Analysis
The FAST Graphs software is a powerful tool used to analyze the earnings of a company compared to the share price. The black line is share price and the orange line is earnings multiplied by 15.
ACMR share price is value lower than their earnings currently should be value based on looking at FAST Graphs. Using FAST graphs we can estimate returns based on a fair value of earnings based on analysts projections of earnings and we see that ACMR could return 50% year over year. This is inline with the approximate earnings growth that we see predicted on finviz.
Bull Thesis
ACMR is a high growth investment. They are the “pick and shovel” play for the semiconductor industry. Semiconductors are the most in demand market based on AI and cloud computing. This drives the demand for ACMR products. The valuation is very reasonable compared to growth that is expected. ACMR could even be considered undervalued based on its current growth projections. The return on investment could be around 50% based on earnings growth and even higher upside based on possible multiple expansion.
This company is dependent on the growth of the semiconductor industry in China. China is projected to still be one of the fastest growing economies in the world. They are also fighting for semiconductor supremacy. These macro conditions favor ACMR to keep up the growth. The market cap only being $1 Billion means there is large room for growth for this company and that they are still in the growth phase not the maturing phase.
Bear Thesis
ACMR is based on the growth of China and China is facing major macroeconomic headwinds. China is facing deflationary pressures and growth is slowing. This does not project well for the continued strong demand for ACMR products. As a small cap company in a hot industry there are execution questions for this management team. There could be large amounts of volatility and being small they could only have trouble managing unforeseen headwinds. There is no margin of safety investing in this company and if things go wrong they could go really wrong. There are always geopolitical risks associated with investing in China. In particular there is risk involved with investing in China in an industry that the US is competing with directly from a national security perspective.
Rating
Basil Leaf Capital Rates ACMR a BUY. The growth story is a great opportunity to achieve a multi bagger in our portfolio. The earnings growth is projected to be 40% year over year. That would beat our investing goal of 15% by a lot. The “pick and shovel” type investments are usually a great way to get exposed to a hot industry. The semiconductor industry has been the hottest industry for a while due to the raging demand for artificial intelligence and cloud computing. Another reason to believe the growth story from ACMR is the exposure to China. China desperately wants to be the leader in the artificial intelligence industry. This will drive investment by foundries to produce more chips leading to more demand for ACMR products as well. This is a great chance to buy growth at a reasonable cost. This is a small cap investment and could be subject to large amounts of volatility because of that. If you cannot stomach too much volatility this won’t be the investment for you.