Amkor has been on fire lately. In the past six months alone, the company’s stock price has rocketed 45.6%, reaching $68.49 per share. This was partly thanks to its solid quarterly results, and the run-up might have investors contemplating their next move.
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Why Do We Think Amkor Will Underperform?
Despite the momentum, we’re cautious about Amkor. Here are three reasons why there are better opportunities than AMKR, plus one stock we’d rather own.
1. Long-Term Revenue Growth Disappoints
Reviewing a company’s top-line performance can reveal insights into its business quality. Growth can signal it’s capitalizing on a new product or emerging industry trend. Amkor’s annualized revenue growth rate of 5.1% over the last two years was decent for a semiconductor business. Semiconductors are a cyclical industry, and long-term investors should be prepared for periods of high growth followed by periods of revenue contractions.
2. Low Gross Margin Reveals Weak Structural Profitability
Gross profit margin is a key metric to track because it shows how much money a semiconductor company gets to keep after paying for its raw materials, manufacturing, and other input costs.
Amkor’s gross margin is one of the worst in the semiconductor industry, signaling it operates in a competitive market and lacks pricing power. As you can see below, it averaged a 14.3% gross margin over the last two years. That means Amkor paid its suppliers a lot of money ($85.69 for every $100 in revenue) to run its business.
3. Mediocre Free Cash Flow Margin Limits Reinvestment Potential
Free cash flow isn’t a prominently featured metric in company financials and earnings releases, but we think it’s telling because it accounts for all operating and capital expenses, making it tough to manipulate. Cash is king.
Amkor has shown poor cash profitability relative to peers over the last two years, giving the company fewer opportunities to return capital to shareholders. Its free cash flow margin averaged 2.9%, below what we’d expect for a semiconductor business.
Final Judgment
Amkor falls short of our quality standards. Following the recent surge, the stock trades at 32.7× forward P/E (or $68.49 per share). This valuation tells us it’s a bit of a market darling with a lot of good news priced in – we think other companies feature superior fundamentals at the moment. We’d suggest looking at the Amazon and PayPal of Latin America.
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