Stock of the week - Camtek (16.10.2024)

Camtek LTD (CAMT.US) is riding the AI wave with its advanced semiconductor inspection and metrology solutions. As the demand for high-performance computing chips skyrockets, Camtek's technology is becoming increasingly crucial in ensuring the quality and reliability of these complex components. With its stock up nearly 22% year to date, is Camtek poised for further growth, or has the market gotten ahead of itself?

Key Points

• Q2 2024 revenue of $103M, up 39.6% year-over-year
• Non-GAAP EPS of $0.66, beating estimates by $0.02
• Q3 2024 revenue guidance of $107-110M, implying 35% year-over-year growth
• Gross margin improved to 51% in Q2 2024 from 48% in Q2 2023
• Over 50% of Q2 sales were for high-performance computing related products
• Strong cash position of $453.9M as of June 30, 2024
• Stock price up 22% YTD
• Launched 5th Generation Eagle System, strengthening position in advanced packaging markets

Business Description

Camtek LTD is an Israel-based technology company specializing in inspection and metrology solutions for the semiconductor manufacturing industry. The company's products are critical in the production of advanced packaging, memory, CMOS image sensors, and other semiconductor devices.

Source: Camtek Investor Presentation

Camtek's core business revolves around providing sophisticated equipment that ensures the quality and reliability of semiconductor components. Their systems are used to inspect and measure various aspects of semiconductor wafers during different stages of the manufacturing process. This includes patterned wafer inspection, interconnect inspection, and process control.

Source: Camtek Investor Presentation

In recent years, Camtek has positioned itself as a key player in the high-performance computing (HPC) and artificial intelligence (AI) chip markets. Their solutions are particularly valuable in the production of high-bandwidth memory (HBM) chips, which are crucial components in AI and HPC applications.

The company serves a global customer base, with a significant portion of its business coming from tier-one semiconductor manufacturers. Camtek's technology plays a vital role in helping these companies maintain high yields and quality standards in their increasingly complex manufacturing processes.

Recent Earnings

Camtek's Q2 2024 financial results demonstrated strong growth and improving profitability:

• Revenue reached $103 million, a 39.6% increase year-over-year and a 6% increase from Q1 2024.
• Non-GAAP earnings per share were $0.66, surpassing analyst estimates by $0.02.
• Gross margin improved to 51%, up from 48% in Q2 2023, reflecting a more favorable product mix and improved cost structure.
• Operating margin rose to 30%, compared to 24.8% in Q2 2023.
• The company generated $42.2 million in operating cash flow during the quarter.
• Days sales outstanding improved significantly from 81 days to 61 days, indicating strong collections.

These results underscore Camtek's ability to capitalize on the growing demand for advanced semiconductor inspection and metrology solutions, particularly in the HPC and AI sectors.

Future Outlook

Camtek's management is optimistic about the company's future prospects, bolstered by recent technological advancements:

1. Near-term Growth: For Q3 2024, the company expects revenue between $107-110 million, representing about 35% year-over-year growth at the midpoint. Management also anticipates continued sequential growth in Q4 2024.
2. HPC and AI Demand: The company sees ongoing strong demand for its HPC-related products, which accounted for over 50% of sales in Q2 2024. This trend is expected to continue through 2024 and into 2025.
3. New Product Launch: On September 24, 2024, Camtek introduced the Eagle Generation-5 (Eagle G5) inspection system. This new system offers improved wafer throughput and optical resolution, addressing both current market demands and future customer needs. The company has already received orders for 2025 deliveries, indicating strong market interest.
4. Technological Leadership: The Eagle G5 is the first in a series of new products developed by Camtek in recent years. These new solutions are designed to meet the inspection and metrology needs of upcoming Advanced Packaging technologies, characterized by fine pitch micro bumps and hybrid bonding interconnects.
5. Market Expansion: The company anticipates growth opportunities as more countries invest in local semiconductor manufacturing capabilities, driven by the strategic importance of advanced semiconductor components.
6. 2025 Growth Expectations: CEO Rafi Amit expressed confidence that 2025 will be another growth year for Camtek, supported by healthy demand in end-markets and the initial contribution from new products like the Eagle G5.
7. Profitability: Management expects gross margins to remain at similar levels in the coming quarters, indicating sustained profitability.

However, investors should consider several risk factors:

1. Industry Cyclicality: The semiconductor industry is known for its cyclical nature, which could impact Camtek's growth trajectory.
2. Geopolitical Risks: As an Israel-based company with significant exposure to the Asian market, Camtek faces potential geopolitical risks that could affect its operations or market access.
3. Competition: The company operates in a competitive market with larger players, which could pressure margins or market share in the future.

In conclusion, Camtek's strong position in the growing HPC and AI chip markets, coupled with its improving financial performance and recent product launch, makes it an interesting stock to watch. The introduction of the Eagle G5 system and management's positive outlook for 2025 suggest potential for continued growth. However, associated risks suggest that potential investors should carefully consider their risk tolerance and investment horizon when evaluating this opportunity.

Valuation

We decided to base our assumptions on historical averages and company forecasts. We have assumed a 22% revenue growth and 30% operating margin for the 5 years of forecasts. Decision to make 5 years of detailed forecasts rather than 10 years was made due to huge uncertainty over whether the company's robust growth rates will last. Other assumptions were based on 5-year averages. 

As terminal value tends to account for a significant part of DCF valuation, especially with shorter periods of detailed forecasts, we have decided to take a very conservative approach here. For the terminal value calculations we have used a 5.5% revenue growth as well as 10.5% terminal WACC, down from 12% WACC used for 5 years of forecasts to capture the effect of sector growth. Also the assumption of high terminal revenue growth is based on the outlook that the sector will be able to sustain high growth in the future, as needs related to AI evolve. 

Such a set of assumptions provides us with an intrinsic value of $99.49 per share which showcases an upside of 19.9%% to current market price. 

A point to note is that the intrinsic value obtained via the DCF method is highly sensitive to assumptions made. Two sensitivity matrices are provided below - one for different sets of Operating Margin and Revenue Growth assumptions and the other for different sets of Terminal WACC and Terminal Revenue Growth assumptions. 

Source: Bloomberg Finance LP, XTB Research

Source: Bloomberg Finance LP, XTB Research

Next, let's take a look at how Camtek compares with peers. We have constructed a peer group consisting of 4 companies, whose business model might be similar to Camtek: Ametek, Keysight Technologies, Fortive Corporation and Trimble. As can be seen Camtek is above the mean for the peers in every aspect. We have calculated mean, median as well as cap-weighted multiples for the peer group. Three different Camtek valuations for each of those multiples were later calculated. As one can see in the table below, the vast majority of those suggest that Camtek shares are overvalued at current prices, with forward P/E valuation offering the lowest discount to current share price.

Source: Bloomberg Finance LP, XTB Research

Recommendations: Camtek has 9 recommendations, with 9 "buy" and highest price of $140. The 12-month average stock price forecast is $112.56, implying a 35.8% upside potential from the current price.

Technical analysis: 

The price is currently hovering around a key resistance at the 23.6% Fibonacci retracement level, a zone that previously triggered a correction of over 15% following a failed breakout. For bulls to regain control, the price must remain above the 50-day EMA, which is tightening near the 200-day EMA, indicating potential volatility ahead. A decisive break above the 23.6% Fibonacci retracement would signal bullish strength, with the next target being the 100-day EMA at $89.78.

If bulls fail to push through, bears may gain the upper hand, with key support levels at $74.8 and the September low of $70.52. The RSI is showing bullish divergence with higher highs and lows, but a drop below recent lows could shift sentiment. The MACD is nearing positive territory but remains tight, while the DMI also indicates potential for increased volatility.

Source: xStation