Dark clouds are looming for the global economy as a mix of high inflation and surging interest rates threatens to crimp consumer demand.
The same is happening for the semiconductor and microchip sectors, too.
AEM Holdings Limited (SGX: AWX), which provides semiconductor and electronics test solutions, has been caught in the crosshairs of these headwinds.
The test solutions provider has seen its share price plunge 35.3% year to date after hitting an all-time high of S$5.35 back in December last year.
Can AEM’s share price regain its former glory anytime soon?
Sector-wide worries
To be sure, the worries dogging the semiconductor sector are not unfounded.
Technology stocks have plunged sharply this year as demand slows for everything from personal computers to smartphones.
iPhone manufacturer Apple (NASDAQ: AAPL) was said to have dropped plans to increase the production of its iPhone 14 after sales missed the company’s projections.
Semiconductor chip manufacturer Intel (NASDAQ: INTC) is also planning to reduce headcount as demand plunges, while social media giant Meta Platforms (NASDAQ: META) is scheduled to announce massive layoffs this week.
With consumer demand falling, demand for semiconductors should also decline in tandem, thus putting pressure on companies such as AEM which designs test solutions for such firms.
It’s useful to remember that the semiconductor sector is cyclical by nature and semiconductors have a short life and become obsolete when new and better applications are developed.
Demand shot up sharply in the last two years due to rapid digitalisation but supply is catching up fast as many players rapidly built up capacity.
Hence, with demand waning, many of the semiconductor manufacturing companies could be sitting on idle capacity.
A strong quarter and a record year
AEM, though, seems to have bucked this downward trend for now.
The group reported its highest-ever revenue and net profit before tax for the first nine months of 2022 (9M2022).
Revenue for 9M2022 soared 120.6% year on year to S$746.5 million while profit before tax more than doubled year on year to S$141.4 million.
AEM’s net profit of S$115.3 million for 9M2022 has already exceeded its full-year 2021’s net profit of S$91.9 million and is on its way to becoming the group’s highest-ever annual net profit.
The better performance was because of volume ramp-ups from its new and existing customers and also contributions from CEI Limited which it acquired in March last year.
A sanguine outlook
Despite the headwinds reported for the electronics sector, AEM maintains a sanguine outlook for 2023 and beyond.
The group estimates that the microchip market will grow from US$510 billion in 2021 to US$954 billion by 2030.
Sectors that will drive this growth included computing, artificial intelligence, automotive, and data storage.
Also, AEM expects the west to increase its technology investments with a large part of the assembly and testing taking place in Southeast Asia.
These long-term trends should bode well for AEM’s Test 2.0 solutions that the group is helping to customise for its customers.
Elsewhere, the group estimates that its serviceable addressable market (SAM) stands at US$3 billion, allowing sufficient room for further revenue and profit growth.
Over time, AEM projects that this SAM will grow to US$3.6 billion in line with the expansion of the market for different and more comprehensive test solutions.
Get Smart: Time is needed
While AEM has demonstrated its resilience thus far and continues to report record results, caution is warranted.
The slowdown in the semiconductor sector could have a lag effect that may take time to filter down to the testing and support sectors.
While 2022 is turning out to be a record year for AEM, investors will do well to continue to monitor the industry as changes can come fast and furious.
AEM investors can, however, look forward to a possibly higher final dividend after the group more than doubled its interim dividend from S$0.026 to S$0.067.
Meanwhile, its share price could continue to languish in the short term as weak sentiment persists for both the semiconductor and electronic sectors.
Hence, it could take a while before AEM’s share price surpasses its previous all-time high.
But with its cutting-edge Test 2.0 solutions along with the support of Temasek Holdings, it may just be a matter of time before its share price regains its former glory.
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Disclaimer: Royston Yang owns shares of Apple and Meta Platforms.
