The dust has settled and the initial shock from knowing that its 1H2024 net profit plummeted by 95.8% year-on-year (YOY) should have diminished.
Oh, I wasn’t describing myself as I had little to no expectation of AEM Holdings (SGX: AWX) results this year. When I decided to reinvest in AEM back in April, my eyes were on its potential from FY2025 onwards.
This continues to be so even after its key customer Intel Corporation (NASDAQ: INTC) dreadful 2Q2024 results and forward guidance.
With its price continued to slide after AEM reported its 1H2024 earnings report, I was once again tempted to add more to my position. Time time round, I decided that additional homework needs to be done before making a decision.
Using SWOT Analysis Structure To Understand the Company
The idea of doing a SWOT analysis just came to mind.
I would like to emphasise that I am only using a SWOT analysis as a personal framework to structure my thoughts about AEM. As a retail investor without specific knowledge of the semiconductor industry, this analysis should not be considered a professional or in-depth evaluation of the company.
Strengths: Strategic partnership and technological edge
AEM’s strategic partnership with its key customer to develop high-density test handlers from 2011 to 2014, laid the groundwork for its growth to become a leader in the semiconductor testing space. This successful collaboration fuelled a sustained period of growth for eight years till 2022.
Moreover, AEM’s commitment to research and development has resulted in it having a robust intellectual property portfolio. This investment has led to the development of Test 2.0 Solutions, which has a technological advantage over existing test handlers in the market.
Weaknesses: Over reliance on key customer and small player on global stage
AEM’s reliance on a single major customer, while initially beneficial, has proven to be a double-edged sword.
Although it facilitated rapid growth during favourable market conditions, the company’s revenue plummeted when the semiconductor industry and its key customer faced downturns in recent years.
Despite management’s efforts to diversify its customer base since 2019, AEM’s relatively small size and market position make it difficult to attract new customers. Even with exceptional products, establishing relationships with new customers often take many years of effort.
Opportunities: New customers and possibly turnaround of key customer
These efforts to engage with new customers are gaining momentum.
In its latest 1H 2024 earnings, AEM announced an initial order of over S$20 million for a new customer’s early production ramp, with the systems expected to ship in 4Q2024.
Combined with projects of the other new customers, AEM expects revenue from new accounts to hit triple-digit millions in 2025.
Beyond these new customers, opportunities still abound with its key customer. Announced in 2022, AEM has a longer dated, non-cancellable purchase order at S$280 million.
Moreover, AEM is poised to benefit from the key customer’s new foundry business, which is anticipated to commence production in the first half of 2025.
Threats: Cyclical nature of semiconductor and stiffer competition
While there are abundant opportunities, AEM faces significant threats, including the cyclical nature of the semiconductor industry. As evidenced by the recent downturn, demand for its equipment can plummet, leading to a sharp decline in revenue and profit.
Moreover, AEM is likely to face stiffer competition from larger established players. To maintain its competitive edge and ensure sustained growth, the company must continuously differentiate itself by offering exceptional value to its customers.
Long-term opportunity if AEM gets its execution right
Despite the current challenges, AEM’s mid-term outlook remains promising, especially if it can successfully expand its market share.
My back of the envelop calculation indicates a potential revenue of S$500 million and earning per share of S$0.14. This would translate to a forward PE of about 9.8x based on yesterday’s closing price of $1.37.
While this seems attractive, considering the potential multi-year growth trajectory with its new customers, there is no guarantee of its success.
After considering the potential benefits and drawbacks, I decided that my current position is sufficient to capitalise on AEM’s potential growth. Unless…
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