Artificial intelligence (AI) is primarily deployed using centralized data centers, but it is slowly migrating to computers and smartphones, which could cause a productivity explosion across the economy. None of this would be possible without the advanced semiconductors supplied by companies like Nvidia, Advanced micro devicesAnd Micron technology.
Some smaller companies supply crucial equipment and services to these chip giants, but they generally receive less attention from investors. Axcelis Technologies (NASDAQ: ACL)For example, supplies chip manufacturers with ion implant equipment that is crucial to the manufacturing process. AI is already driving demand for the company’s products.
Axcelis stock is currently very cheap compared to its peers. Here’s why it could be a good buy as the AI revolution gains momentum.
A unique way to invest in the AI revolution
Ion implantation is a necessary part of the manufacturing process for central processing units (CPUs), memory chips and power devices (which control electrical power in high-current applications). The power device segment has been particularly lucrative for Axcelis in recent years, thanks to the electric vehicle industry, which is constantly looking for ways to charge batteries faster and get more miles out of each charge.
But data centers built for AI present a new opportunity in this space because they are power-hungry. Some of Axcelis’ customers have begun using silicon carbide-based trench MOSFET (metal oxide semiconductor field effect transistor) power devices for their AI infrastructure. Silicon carbide chemistry is more heat-efficient and robust under heavy workloads than traditional silicon chemistry, but is more implant-intensive, creating an immediate tailwind for Axcelis’ business.
AI chips also present a growing opportunity for Axcelis. Many Nvidia-designed graphics processing units (GPUs) for data centers come with onboard memory, which requires ion implantation. In addition, computers and devices increasingly require dynamic random access memory (DRAM) capacity to run AI software, so manufacturers may need to expand their production facilities, creating organic demand for Axcelis equipment.
Preparing for a strong 2025
Axcelis achieved record revenue and profit in 2023, well above original expectations. It was therefore a challenge to exceed those results in 2024.
Axcelis generated $256.5 million in revenue in the second quarter of 2024 (ended June 30). While that crushed management’s forecast of $245 million, it was still a 6.3% decline from the same quarter in 2023. Wall Street expects the company to generate just over $1 billion in total revenue for all of 2024, a marginal decline from last year.
However, Axcelis’ guidance suggests it could return to growth in 2025, with $1.3 billion in revenue, a 24% jump year-on-year. The company currently has a backlog of more than $1 billion, supporting expectations for a strong 2025 result.
Additionally, Axcelis has already begun building inventory as it expects memory chip makers to add more capacity in late 2024 and early 2025. Furthermore, the company expects the silicon carbide power device market to grow 25% annually through 2029, driven by demand from AI data centers and electric vehicles, laying a foundation for steady revenue growth over the longer term.
Axcelis shares are cheap right now
Despite the slowdown in revenue, Axcelis is still very profitable, generating $7.26 in earnings per share over the past 12 months and trading at a price-to-earnings (P/E) ratio of just 13.5.
That’s a 42% discount on the S&P 500which is trading at a price/earnings ratio of 23.8. It is also significantly cheaper than the iShares Semiconductor ETFwhich is trading at a price/earnings ratio of 32.8. In other words, Axcelis stock would be worth more than double just to be on an equal footing with its competitors in the chip sector.
The company’s lack of growth is the primary reason its stock is currently trading at a deeply discounted valuation. To spark a recovery, it will need to prove to investors that it can deliver on its 2025 estimates. But if it does, investors who buy the stock today could make a very nice return.
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Anthony Di Pizio has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Advanced Micro Devices, Nvidia and iShares Trust-iShares Semiconductor ETF. The Motley Fool has a disclosure policy.
1 Super Semiconductor Stock To Buy Tooth and Nail For The AI Revolution was originally published by The Motley Fool
