Advanced Energy Industries Takes A Hit As The Semiconductor Cycle Is Still Sorting Itself Out

I believe Advanced Energy Industries (AEIS) highlights at least some of the risks I've seen in the rally in semiconductor and semiconductor equipment names. Even though the year-to-date performance is still strong (up about 18% as of this writing), the shares have come down about 15% off a recent peak on a combination of weaker first quarter results and guidance, as the market isn't seeing the quick, sharp recovery that investors want to believe is going to happen.

Another weak quarter (or two) remains in play as a risk factor, but I think these shares hold some appeal for more risk-tolerant investors. I don't see any real sign that AEIS is losing traction with its two largest customers (Applied Materials (AMAT) and Lam Research (LRCX)), and I think the long-term outlook and realities of the semiconductor market mean good long-term demand for chip-making equipment and AEIS's components.

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Advanced Energy Industries Takes A Hit As The Semiconductor Cycle Is Still Sorting Itself Out

AEIS Powered Down For Now, But Still Undervalued On An Eventual Semiconductor Recovery

Down a little bit from my last write-up (during which time the stock swooned another 25% only to regain most of that), Advanced Energy Industries (AEIS) is a tempting target in a sector undergoing serious pressure and downward revisions as semiconductor companies, particularly in the memory space, slash their capex budgets and semiconductor equipment companies cut their orders for critical components like power supplies, matchboxes, and plasma generators.

This year (2019) is likely to be ugly, and I’m not ruling out the possibility of another round (or two) of guidance revision, but at some point the sector will bottom out, and I think AEIS’s leadership in power subsystems is worth more than the share price currently reflects and I think management has the capability to do something a little more dramatic on the capital allocation side.

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AEIS Powered Down For Now, But Still Undervalued On An Eventual Semiconductor Recovery

With The Semi Cycle Clearly Dipping, Is It Time To Revisit AEIS?

When I last wrote about Advanced Energy Industries (AEIS), I noted that while I think this is a strong company in the power components and subsystems space, the risk of further deterioration in the near-term outlook for semiconductors and semiconductor equipment skewed the risk too negatively in view. The shares are down another 10% since then, along with a significant cut to third quarter guidance, and there is no longer much pushback from readers on whether there really is a slowdown underway.

It’s really easy to get an itchy trigger finger with high-quality plays like AEIS and VAT (OTCPK:VACNY), as it’s typically only during these downturns that you get an opportunity to buy in at better valuations, and you don’t want to miss the eventual rebound. On the other hand, it’s pretty common for analysts and investors to misjudge the length and depth of down-cycles at the beginning, and it’s frustrating to buy in at the bottom only to discover another 20% or more downside.

I continue to believe the long-term value of AEIS shares is well above current levels (in the mid-$60s to mid-$70s), but I would also point out that these shares have traded as low as 1x tangible book in the not-so-distant past, suggesting another 50% downside if things really go sour in the market. I don’t expect that to happen, and I believe the long-term drivers of chip demand remain sound, but with 2019 possibly shaping up as a tougher year too, investors considering these shares should at least go in with their eyes open to the downside risks.

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With The Semi Cycle Clearly Dipping, Is It Time To Revisit AEIS?

Advanced Energy Industries Closer To The Edge

Everybody has probably seen at least one video of a person (usually a male between the ages of 15 and 40) running full-speed at some sort of barrier that the runner assumes is lightweight and/or will be easily passed through… only to discover too late (typically upon regaining consciousness) that it was actually quite solid.

I mention that as an opening to the dilemma facing Advanced Energy Industries (AEIS) investors right now. Based upon what major customers like Applied Materials (AMAT) and Lam Research (LRCX) are saying, it looks pretty likely that semiconductor equipment demand growth will slow noticeably in 2019 - but is this a "lightweight" barrier that is just a dip in a long-term growth trajectory driven by new architectures and strong demand for IoT and memory or is the industry looking at a hard stop and a return to the "normal" cyclicality of past eras?

I'm cautiously optimistic that it is more the former than the latter, and it doesn't take hefty growth assumptions to drive a worthwhile fair value here. I advised caution on AEIS back in mid-February and the shares are down slightly since then (peers like MKS Instruments (MKSI) and Comet (OTC:CHLDF) (COTN.S) have done similar-to-worse, while XP Power (OTCPK:XPPLF) (XPP.L) has done better). I think this is still a risky call - buying tech into a slowing growth cycle is tough way to make money - but it's hard to ignore a well-run company with growing end-markets (on a long-term basis) and an interesting valuation.

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Advanced Energy Industries Closer To The Edge