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AEM Holdings Stock Review: Should I Invest?

AEM Holdings (SGX: AWM) is an equipment solutions provider to largely semiconductor industry with some exposure to 5G as well. This is a stock that I invested in and exited fairly early to realize the sizable amount of profit, at least for newbie like me haha. Unfortunately, my "crystal ball" didn't tell me that AEM would continue to rise further but profit is still profit!

In the recent market crash, AEM saw its share price plunged by over 40% from $2.30 to $1.30. What caught my attention was that it bounced back to $2.03 so quickly. Keep in mind that all of this happened just within a span of 2 months. With such peculiar movement, I decided to look into AEM again and attempt to comprehend what's making investors feeling so great about this business.

AEM chart from Yahoo Finance

Revenue, net income and FCF Y-O-Y

Data from MorningStar

This time round, I included revenue because profit margin can easily be gauged from the chart. Based on the chart, AEM had continuously brought in more revenue from 2017 to 2019. Similar trend could be seen for net income and free cash flow which is something I always like to see in a business.

Despite COVID-19 causing a global disruption, management maintained their sales guidance for 2020 to be $360 to $380 million with Q1 being their best performing quarter bringing in $135 to $145 million. You can read the announcement here.

This works out to be another 10% increase in revenue for 2020 assuming their customers do not cancel their orders. Using the past 5 years data to extrapolate net income and FCF for 2020, we should see the same uptrend.

Now that Q1 is behind us, revenue for Q1 is more or less locked in. As for the remaining amount, time will tell.

Revenue breakdown

Data from AEM Q4 2019 result

AEM's core business comprises of 4 segments: 1. Equipment Systems Solutions (ESS), 2. System Level Test & Inspection (SLT-i), 3. Micro-Electro-Mechanical Systems (MEMS) and 4. Test and Measurements Solutions (TMS).

Based on the chart above, ESS makes up almost the entire revenue with their key customer being Intel which lacks diversification on both levels. If Intel were to get into trouble, AEM will most likely mirror them. Additionally, being in the semiconductor industry has its risks as it is a highly cyclical.

It is great that AEM identified and diversified into 5G. Nevertheless, the 5G segment is still in its infancy and will require time for it to grow.

Debt levels

Data from AEM's Q4 result

This is what investors consider as a strong balance sheet because of how low their debt is. On the contrary, others who have a different opinion that AEM is not utilizing debt to finance their investments to grow the business. Low debt is definitely a plus when recession is round the corner.

Business outlook

In Q4 2019 results, the management shared their optimism about the outlook of the semiconductor industry. In the first paragraph of business outlook, a research conducted by Gartner Inc. was cited which highlighted that global demand would recover in 2020 by 12.5% over 2019.

Strangely enough, I happened to chance upon another article by Gartner Inc, Google actually recommended this article on my phone (dammit, stop spying on me!). Gartner Inc. apparently retracted their previous forecast of 12.5% growth and revised to a 0.9% decline on global semiconductor. Well, it sort of make sense since the world right now desperately needs medical supplies but not electronics in the short term.

With that, I guess things are beginning to not look too great for AEM now?

Closing thoughts

After looking through AEM's fundamentals, I do feel that this is still a value stock. However, its huge reliance on Intel is off putting especially during an economy crisis where unemployment claims in US has exceeded 16 million. Everyone will be looking to cut non-essential spending now which Intel will definitely fall into that category. So, I think AEM may face challenges in the short term.

Had times been good instead, I would definitely consider investing in AEM again.

My 2 cents

Disclaimer: The information listed here are strictly my personal opinion. It does not constitute as investment advice. Please do your own due diligence.

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