Axcelis Stock Analysis Deep Dive

A fascinating small niche player in the semiconductor realm

Intro

As a tech-savvy investor I am always searching for interesting opportunities and sectors which are destined to grow. Reading “Chip War” by Chris Miller only further drove the urge to have more exposure into the whole semiconductor value chain. If you haven’t read the book, I highly recommend it. ASML is one of the largest positions in my portfolio and now it’s time to take a deep dive into another interesting company, which is operating in a niche of the whole semiconductor manufacturing.

The Company

Axcelis describes itself like this:

“At Axcelis, we have a single goal: to help semiconductor manufacturers achieve the highest quality and yield, with the lowest cost of ownership. We deliver on that goal with ion implant platforms based on unique enabling technologies that provide unmatched purity, precision and productivity. The result: competitive advantage for our customers—and rapid growth for Axcelis.”

Axcelis designs, manufactures and services ion implantation and other processing equipment used in the fabrication of semiconductor chips. Ion implantation makes up 98% of all revenues and is sold to chip manufacturers. A single machine costs between 2.6m and 12m USD. Apart from selling their Purion family of products, further revenue is generated by aftermarket products and services such as spare parts, tools and maintenance services. The company was founded in 1978 and is based in Beverly, Massachusetts.

Axcelis has more than 3200 machines in use worldwide across 28 different countries. Most of the business is done abroad, since most fabs are based in Asia. In 2023, 84% of all revenue was generated internationally (Asia making up 74%), while 94% of all sales were denominated in USD. Therefore the change in currency valuation is not critical for Axcelis. No customer contributes more than 10% of the Axcelis’ revenue and the revenue share of the top 10 customers has fallen from 70% in 2021 to 52% in 2023.

Production is done at the headquarter in Beverly as well as in South Korea. Axcelis employs a total of 1620 employees.

The Industry

The chip industry has been booming for years and the Covid supply chain disruptions made also the broad public aware, of just how important chips are. Trends such as digitization, IoT, 5G and AI are more than buzzwords and have real business implications.

Creating the most advanced chips is a complex process. More than 300 process steps utilizing over 50 different types of process tools are needed to create a single device like a microprocessor. The fabs (fabrication facilities) are ever growing in both size and quantity and are continuously working on increased efficiency.

If you want to learn the very basics of how a chip is being produced check out this video.

To see how the action is performed in real life, I recommend watching the following video:

Traditionally, the chip industry has been highly cyclical with huge profits in heights and bad losses in downturns. As a reference, see the large swings in the net income of Micron, one of the leading memory chip manufacturers.

McKinsey estimates the global semiconductor market to grow with a CAGR of 7% until 2030 with most of the growth coming from computing and wireless communication.

The Business

Since 98% of Axcelis’ revenue is coming from the ion implantation business, we first need to understand what exactly that is. Axcelis itself describes it as follows (If you want a simplified explanation, then skip this paragraph)

Ion implantation is a principal step in the transistor formation cycle of the semiconductor chip manufacturing process. Ion implantation is also used to change the material characteristics of the silicon or silicon carbide for reasons other than electrical doping, a process known as “material modification.” An ion implanter is a large, technically advanced system that injects dopants such as arsenic, boron or phosphorus into a wafer. These dopants are ionized and therefore have an electrical charge state. This electric charge state allows the dopants to be accelerated, focused and filtered with electric and magnetic fields. Ion implanters use these fields to create a beam of ions with a precisely defined energy level (ranging between several hundred and eight million electron-volts) and with a precisely defined beam current level (ranging from microamps to milliamps). Certain areas of the silicon wafer are blocked off by a polymer material known as photoresist, which acts as a “stencil” to pattern devices so that the dopants will only enter the wafer where needed. Typical process flows require twenty implant steps, with the most advanced processes requiring substantially more steps. Each implant step is characterized by four key parameters: dopant type, dose (amount of dopant), energy (depth into the silicon) and tilt/twist (angle of wafer relative to the ion beam).

If you say now, well that’s quite complicated, I have good news for you: I asked ChatGPT to explain it to a 10 year old:

“Alright! Imagine you have a toy spaceship, and you want to make it super strong so it can fly through anything without getting hurt. Ion implantation is like giving your spaceship a special power-up. Here's how it works: You have tiny, invisible things called ions, which are like magical particles. Scientists use these ions to make materials stronger. They shoot these ions into the material, like shooting lasers at your spaceship. When the ions go inside, they make the material tougher and better at doing its job. So, it's like your toy spaceship getting a special shield that makes it the coolest, strongest spaceship in the whole galaxy!”

Here is another great description which I have found: “Doping, or modifying, a semiconductor wafer is the process by which “impurities” are introduced into the wafer material to alter its electrical properties to form semiconductor devices like Diodes, discrete transistors, and integrated circuits. Ion implanters generate a steerable ion beam, formed from the desired source material, that implants the ions at the required depth and uniformity beneath the surface of the substrate.”

Doug Lawson, the head of corporate Marketing and Strategy shared the following thoughts on the importance of ion implantation: “ion implant, first of all, is the most critical process tool within a power device. It's the equivalent of what lithography is to advanced logic”

To get an idea what the machines look like when they are in action, watch this video from Axcelis. To give you an idea of how little this company is covered by the public, check out the view count of the video. As of this writing it had less than 500 views.

Semiconductor devices often have multiple layers with different electrical properties. Ion implantation helps create these layers by precisely controlling where dopants are placed and how deep they go.

Depending on the use case, three categories of implanters have been developed to focus on the two main parameters dose and energy:

• Medium current implanters are the original model of ion implanter, with mid to low-range energy and dose capability.

• High current implanters were the second type of implanter to emerge, having low energy capability and high dose range.

• High energy implanters emerged to address the need for deeper implants with a high energy range and low dose. Axcelis has been the market leader in this category for many years.

  

Axcelis had most of its revenue coming from the implant intensive power device segment, which accounted for 59% of the systems revenue in 2023. Focusing on power was a great decision, since power used to be a blue ocean with barely any competition. A power (semiconductor) device is mostly used in EVs (electric vehicles), renewable energy and industrial machines These power devices are usually in an on or off mode and can withstand very high electric currents. These characteristics are achieved through multiple steps of ion implantation.

The memory market and especially DRAM is expected to rebound in late 2024 after the current downturn. This will lead to more revenue from the DRAM segment in the next years and will contribute to Axcelis 1.3bn revenue goal in 2025. At the last peak of the DRAM sector, it contributed almost 20% of the total revenue of Axcelis.

The image sensor market (CMOS) is mostly driven by consumer spending. The mobile phone market has been slow since 2019 and therefore also the sales of CMOS sensors (which you need for your camera) has been slow. What has been growing however is the ever increasing amount of sensors in modern cars. Especially in the case of autonomous vehicles you have a countless number of sensors, of which many are image sensors. These in turn drive up the market demand for CMOS sensors.

Axcelis is the market leader in silicon carbide and will derive major growth from this segment in the next years. Within the power segment there is strong growth expected from the implant machines for Silicon carbide (SiC). Tesla started using Silicon carbide chips for the inverters in the drive unit starting with the model 3 since it had significant advantages over chips made from silicon. Axcelis expects the SiC wafer starts to double every three years for the foreseeable future and generate significant revenue with its Power Device machines in this segment. Infineon Technologies, one of the largest semiconductor manufacturers is expecting its SiC revenue to increase 15-fold until 2030.

The price of SiC in comparison to “normal silicon” is expected to come down in the future, which will open markets such as energy and industrial to also adapt SiC as the product of choice. This in turn favors Axcelis which is the leading supplier for the SiC ion implantation market.

Axcelis is partnering with its customers via joint developments to build machines based on the customers needs. For advanced logic applications, Axcelis works with all major advanced logic customers to realize opportunities, to improve their cost of ownership in their device performance.

Axcelis is already looking ahead to grow the business outside of the ion implantation market and hired a VP of Corporate Development to focus on strategy and M&A to continue growing beyond the 2025 goal of 1.3bn revenue.

The by far biggest competitor of Axcelis is Applied Materials, another outstanding company (a great company worthy of a deep dive itself). Axcelis managed to grow its market share in the ion implantation at the cost of Applied Materials in the last years at a fast pace.

The Management

CEO Russell J. Low was appointed CEO in 2023 and joined the company in 2016. He has a Ph.D. in Physical Chemistry and has granted 44 patents. That’s the kind of CEO I like to have in a high-tech company. Former CEO Mary Puma spend 25 years with the company of which she served the last 22 as CEO.

The CFO James G. Coogan joined Axcelis in 2023. Before we can judge the quality of the top management, we need to wait another couple of years.

The management has shown signs of good capital allocation by reducing the outstanding share amount, while keeping enough cash at hand for potential M&A transactions.

Risks

Further tensions between the Western world and China will lead to increasing export controls and bans of Western High-tech. This will impact the option to sell to Chinese customers. At the same time more fabs are “moving” back West in order to secure future chip production especially in the US and in Europe.

The adoption of EVs is key to Axcelis growth since the majority of the revenue is generated by the power device business. We are currently seeing a slower adoption in Europe and the US, but China is still pushing strong in the EV market. At the same time, European and American car makers are still trying to make EV models cheaper. That’s exactly where Axcelis fits into the picture with its ion implantation machines.

The Fundamentals

Even though the industry was in a downturn in 2023, Axcelis delivered record numbers. That tells you something about the strength of the business.

This excerpt is taken from the Q2/23 call: “Axcelis has the rare opportunity to grow revenue and profitability during significant industry downturn. This is a result of strong product positioning in a power device market and continued strong execution in a challenging environment. We also look forward to continued growth in memory and advanced logic as the overall semiconductor market recovers.”

The income statement tells the same story. Strong top line growth has been converted to an also great bottom line. Not all growing companies can say the same. Sometimes the costs are rising as fast as the revenues (yes, Etsy I am looking at you).

Free Cash Flow has been following the net income, with a lag due to the increase in inventory.

Even though the inventory has been steadily rising in terms of absolute value, the average number of days outstanding inventory (a measure to see how much of the cost of goods sold is held relative to inventory) has been steadily declining in the last years.

Axcelis also announced, that it intends to keep the inventory at higher than required levels to buffer any potential supply chain disruption, until improvements in the supply chain will be sustained.

When you focus on the balance sheet you will discover the lines of “unearned revenue”, which usually is the case for software companies. In Axcelis’ case these are prepayment of customers in order to secure a machine. Based on the customers’ credibility, Axcelis sometimes demands the whole product costs going into the machine to be made as a prepayment.

As expected such a high-tech company spends a significant amount of money on R&D. The R&D expenses have been between 9 and 10% of revenue in the last years. Patents are an important factor for Axcelis and the company holds 202 active patents in the US and 487 in other countries.

Aftermarket business contributes 22% to overall revenue and is expected to rise with the increase of the total install base.

For the full year, China represented 46%, the U.S. 15%, Korea 14%, Europe 11%, Japan 3%, Taiwan 2%, and the rest of the world 9%.

2024 is expected to be flat compared to 2023, while the goal of 1.3bn in revenue for 2025 is still standing. The backlog is stable with 1.2bn and guarantees therefore this years revenue. Axcelis is expecting the CS&I revenue to contribute 300m of the 1.3bn revenue goal for 2025.

Valuation

With a market cap of of only $3bn compared to the before mentioned Applied Materials with a market cap of 157bn, Axcelis could be a nice takeover target for one of the bigger players in the industry.

The new share repurchase program of $200m announced in September 2023 would be enough to buy back 6% of all outstanding shares at the current price level.

With 1/6 of the whole market cap in cash and short term investments, the EV (enterprise value) is only 2.6bn. With an EV/net income of 10.5 Axcelis is valued very low. Considering the foretasted growth, we are looking at a single digit P/E in latest 2025.

Historically there have been huge swings in the EV/net income of Axcelis and right now we are at the lower end of the historic valuation.

Summary

Axcelis is in a unique little niche. With the continued growth of EV and hybrid cars the use of SiC will grow. The more advanced the inverters require even higher dosages of ion implant. As the market leader in this specific field, Axcelis will profit strongly from the underlying industry trends. The current low valuation paired with the expected high growth makes Axcelis very interesting at the current level.

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Invest at your own risk, this is not financial advice! This is not a recommendation to buy or sell any securities discussed in the article.

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