MagnaChip Semiconductor Corporation (MX, Financial) presents a sterling value opportunity, in my opinion. The economy, stock market and the chip industry are going to recover soon, and I expect chip stocks will flourish in the future despite the current softness in the industry and wavering investor sentiment.
I like MagnaChip in particular partially because the stock is oversold. It is also a small but profitable company, which is a rarity in today's tech industry, where larger companies are almost always overvalued due to attracting the interest of large investment firms and smaller companies are normally burning cash.
About MagnaChip
MagnaChip maintains primary operations in Cheongju, South Korea. The company designs, manufactures and supplies analog and mixed-signal semiconductor platforms. Its products are primarily display solutions for communications, consumer, industrial and automotive applications. In 2004, the company began operations, and it went public in 2010.
The Power segment of the business includes metal oxide semiconductor field-effect transistors, insulated-gate bipolar transistors, AC-DC converters, DC-DC converters, LED drivers, regulators and power management integrated circuits for appliances and electronic devices internationally.
MagnaChip purposefully designs its products for heat dissipation and energy use reduction to ensure lower operating costs than products of other manufacturers. MagnaChip has 406 patents on file. Its three most prominent patent fields include semiconductor device fabrication, transistor types and integrated circuits.
Oversold stock
Investors have oversold on many semiconductor stocks this year. The 52-week high of the SPDR S&P Semiconductor ETF (XSD) was over $250. The price has fallen over the past year into the $140s and is now ~$188.
GuruFocus dropped its GF Score of MagnaChip Semiconductor in recent weeks to 76 out of 100. The company is financially strong but weak in growth, momentum and valuation, in part because it derives a majority of revenue from the Asia Pacific region, where economies are weak from low Covid vaccination rates in poorer countries and lockdowns in China.
The GF Value chart estimates a fair value for MagnaChip of $12.96. That is near its current share price.
On the other hand, its price-earnings ratio is only 8.38, which looks quite cheap. While revenue has been in a slow downtrend in recent years, net income has been in an uptrend, leading to improved margins.
Essential industry
Semiconductors are essential to almost every industry in a global economy that is becoming more and more saturated with technology everywhere. Le Monde News recently announced a proposed international alliance that demonstrates this trend:
"Chip 4 promises to be a major alliance in the semiconductor field… The project should bring together the United States (champions of equipment), Japan (a leader in the supply of key materials), Taiwan (the top manufacturer of latest-generation electronic chips), and South Korea (an expert in memory chips with giants such as Samsung Electronics (XKRX:005930, Financial) and SK Hynix (XKRX:000660, Financial))."
Chip 4 countries are contributing billions of dollars to R&D and expanding manufacturing domestically. The US committed $52.7 billion. McKinsey & Company estimates in a new report that “the industry is poised for a decade of growth and is projected to be a trillion-dollar industry by 2030.”
Small and profitable
Small and profitable means a lot in the financial world, but it is a rare combination these days in the tech industry. Normally, they attract the attention of equity firms and larger companies in the industry s either investments or acquisition targets. MagnaChip is rumored to be a $1.4 billion merger possibility with either China’s Wise Road Capital or South Korea’s LX Group.
MagnaChip’s second quarter 2022 earnings reported on Aug. 8 reflect the industry and investment softness. In sum, revenue for the quarter was down 2.6% sequentially and down 11% year over year. Supply chain issues prevented deliveries of OLED wafers that are essential to the company’s production. MagnaChip enjoyed a hefty 11% increase in its Power Solution business revenue.
China’s Covid lockdowns stifled its domestic demand for smartphones. That has negatively affected MagnaChip’s production and inventory of display units, created higher foundry costs and led to some chaos in the product mix. Yet, the company still generated $101.4 million in quarterly revenue and non-GAAP diluted earnings per share of 23 cents.
The share price is down 34.5% over the past year from a 52-week high of $22.28 to about $12.62. The low for the year hit $11.91. Shares tumbled ~23% between mid-July and the end of August.
Optimistic future
I see MagnaChip as a bargain at $12.50 or less. Short interest is just 3%. The stock is lightly traded with an average volume of about 450,000 shares. The company does not pay a dividend. The consensus among analysts is that the stock presents few risks. I have a 12-month price target of $18 for this stock, which I might increase to $21 if the semiconductor market gets better.
The Board of Directors affirmed its intention to complete the outstanding share buyback authorization worth $37.5 million.
If conditions are slow to improve, I forecast the third quarter earnings per share (due Nov. 1) might be a loss. This may be a catalyst for exploring the sale of the company. After all, its market cap of $548 million is down from $685 million at the beginning of August. The Board issued a statement that it is “exploring and evaluating strategic alternatives that may be available to the Company to maximize shareholder value.”
Magnachip would be attractive to industry behemoths because the company is relatively small, innovative and profitable. This could help it overcome supply chain issues and deliver cost efficiencies. An acquisition could open new clients and markets for the small company to increase revenue.
