Amkor Technology (NASDAQ:AMKR) is one of the world’s largest OSAT service providers of semiconductor products. AMKR is particularly strong in the premium smartphone market and the automobile market. From 2020 to 2022, AMKR has benefited from the accelerating penetration of 5G smartphones, the surge in demand for semiconductor chips for electrical vehicles, as well as the pent-up demand for consumer electronics and PCs after the pandemic. Unfortunately, since 2023, most of the tailwinds have turned into headwinds. I believe AMKR may have entered a period of slower growth and lower margin. Therefore, I am giving AMKR a “hold” rating.
AMKR’s high dependence on the communication end market
As stated in AMKR’s latest annual report, AMKR’s products and services are sold in four end market: “communications, consumer, computing, automotive, industrial and other.” The communication end market includes mostly smartphones and tablets. The consumer end market includes TVs and consumer wearables. And the computing end market includes “datacenter, infrastructure, PC/laptops and storage”.
Of the four major end markets, the communication end market is the most important revenue contributor to AMKR as it accounts for 40-50% of AMKR’s total revenue.
AMKR 2023 annual report
AMKR experienced rapid growth from 2020-2022, which is in line with the growth rate of the WFE (wafer fabrication equipment) market. It is noteworthy that AMKR’s growth rate during this period is much higher than its largest competitor, ASE Technology (ASX).
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After breaking down AMKR’s growth between 2020 and 2022 by end market, it’s very clear that AMKR’s growth during this period of time is mostly driven by the growth in the communication end market, which contributed to more than 50% of the growth of AMKR.
AMKR, author’s estimate
However, according to Statista, global smartphone shipment has actually declined between 2020 and 2022.
Statista
Although total worldwide smartphone sales were down, AMKR’s sales for the communication end market grew 34.5%, 21.5% and 24% in 2020, 2021, and 2022. This disconnect is due to the fact that AMKR’s growth in the communication end market is mostly driven by increased penetration of 5G smartphones. As shown in AMAT’s 2021 investor day slides, 5G adoption has been slow prior to 2019. However, the penetration rate suddenly picked up in 2020 and 2021.
Applied Materials 2021 Investor Day
In 2022, the 5G smartphone tailwind continued. AMKR’s CEO Giel Rutten explained during the Q4 2022 earnings call, “although total smartphone units were down around 10% in 2022, 5G units increased around 20%. Semiconductor content and premium tier 5G phones continues to increase and an ongoing innovation, improved performance and add functionality.”
In 2023, AMKR’s revenue from the communication markets increased another 4% despite the decline in the worldwide smartphone unit shipment. During the Q4 2023 call, AMKR’s CEO Giel Rutten explained that AMKR’s “market share gains within the iOS ecosystem drove this increase by utilizing our advanced SiP technology.”
Looking ahead, the tailwinds of 5G adoption and iOS market share gain are largely gone. AMKR’s performance in the Android ecosystem has been disappointing. I think AMKR’s communication business has reached the inflection point and I expect slow growth or even decline in the next 2-3 years.
Mixed outlook for other markets
Besides communication, AMKR has three other end markets, namely consumer, computing, automotive, industrial and other. During the latest Q2 2024 earnings call, AMKR’s management has cautioned that “revenue from automotive and industrial end market was down 2% sequentially. And the recovery in this market is taking longer than anticipated due to weak demand and ongoing inventory corrections”. Similarly, revenue from the consumer end market decreased sequentially as well. Management noted that “traditional consumer product demand has been muted”.
On the plus side, revenue from the computing end market showed some strength “driven by strength in AI devices and several new product introductions for ARM-based PCs”. Management expects “2.5D advanced package revenue to quadruple versus 2023 levels”, and “high-volume production ramp of a new wearable product utilizing advanced SiP technology is expected to start in the third quarter.”
For AMKR, it’s very hard to predict what the next 2-3 years will look like as there are a lot of moving pieces and advanced packaging is the only area where growth is guaranteed.
Valuation and risk discussion
AMKR’s stock sank almost 19% after management gave a weaker-than-expected Q3 guidance along with the Q2 earnings release. The stock has traded sideways since then. It appears that the market has priced in some near term pessimism.
From a valuation perspective, AMKR does look cheap compared to its peers. On a P/E basis, the company trades at 19.4 times non-GAAP forward earnings, which is almost 18% lower than the sector median. On an EV/EBITDA basis, AMKR trades at 6.53 times on a forward basis, which is a more than 50% discount to the sector median.
However, compared to AMKR’s own 5-year average, the company’s current valuation level does not appear to be very attractive as its forward P/E (non-GAAP) ratio is 28% above the 5-year average, and its forward EV/EBITDA ratio is 32% above the 5-year average.
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In terms of risks, the macro environment has definitely turned more negative in the recent two months. Further signs of weakness in U.S., Europe and China will inevitably dampen the demand expectation for all of AMKR’s end markets. In the shorter term, for Q3 specifically, management has mentioned that they expect “constraints and high bandwidth memory supply to limit revenue growth”. I think AMKR’s stock may have further downside if one of the two risk factors materialize later this year.
Conclusion
To sum up, while AMKR has experienced an impressive growth rate from 2020 to 2022, the company is facing the reversal of some of the previous tailwinds in its communication end market. Furthermore, the outlooks for the other end markets are mixed. Despite trading at a discount to its peers, AMKR’s current valuation is not compelling enough for me to give it a “buy” rating given the macroeconomic uncertainties. Therefore, I am giving AMKR a “hold” rating.
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