In the 37-year history of the Nasdaq-100 index, it has only posted a loss in consecutive years on one occasion: during the dot-com tech crash from 2000 to 2002. Therefore, when the index plunged 33% last year, a rebound in 2023 was the likely outcome.
True to history, the Nasdaq-100 has absolutely ripped higher with a 52% gain this year. Macroeconomic headwinds, like inflation and interest rate pressures, eased, which was helpful. But investors will be pleased to know that also bodes very well for 2024. See, bounce-back years like 2023 have always been followed by another positive year, which tends to produce a return of 21.5% (on average).
With that in mind, semiconductor stock Axcelis Technologies (ACLS -3.09%) could be a fantastic buy if the market continues to move higher. The company is growing its revenue and earnings at a brisk pace, and its stock trades at a bargain valuation right now. Here's what investors need to know.
Axcelis is carrying a huge order backlog into 2024
Axcelis isn't a chip producer, but it sells its ion implantation equipment to leading chip makers, forming a critical part of the fabrication process. Therefore, the company is still exposed to growing demand across the industry for chips in categories like electric vehicles and artificial intelligence (AI).
In fact, Axcelis has experienced strong demand this year from producers of silicon-carbide power devices in the electric vehicle industry. Power devices process and deliver electric power in workloads requiring high currents, and silicon carbide leads to more efficient results than traditional silicon-based hardware. In electric vehicles, that translates to faster charging times and more mileage per charge.
AI isn't a major revenue driver for Axcelis at the moment, but in its third-quarter conference call with investors, management highlighted the technology's requirement for increasing amounts of memory (DRAM) and storage (NAND) capacity. As a result, the company is expecting AI to become a source of strong demand.
Nevertheless, the company has its hands full with its existing end-markets. It currently has an order backlog worth $1.2 billion, nearly a record high, and it will carry the majority of it into the new year. For context, it's equivalent to more than 12 months' worth of revenue.
Revenue is on track to set a record this year
Axcelis generated $820.3 million in revenue through the first three quarters of 2023 (ended Sept. 30), representing a year-over-year increase of 25.4%. The company is on track to deliver a record-high $1.1 billion in revenue for the full year.
The company's results are even more impressive considering many chipmakers have recently suffered a slowdown in revenue growth -- some, like Advanced Micro Devices, even saw revenues shrink. Markets such as personal computing and gaming have suffered from a drop in consumer spending but should improve next year, given inflation and interest rates have declined from their peaks.
But Axcelis is somewhat insulated from some of those short-term struggles because its customers typically plan their capital expenditures years in advance. If they intend to have a higher chip production capacity in the future, they might place equipment orders today in preparation (hence Axcelis' deep order backlog). That's why Axcelis stock has the potential to be a reliable long-term performer.
Image source: Getty Images.
Axcelis stock looks like a total bargain going into 2024
Axcelis is highly profitable, and it's on track to deliver $7.27 in earnings per share for the year. Based on its current stock price near $136, it trades at a price-to-earnings (P/E) ratio of roughly 19.
That's a 32% discount to the Nasdaq-100 index, which trades at a P/E ratio of 28. The index is home to prominent chip companies like Nvidia, Advanced Micro Devices, and Texas Instruments (among others).
Despite Axcelis not producing chips, management's commentary suggests it will benefit from the AI tailwind going forward. The company also has a very strong year ahead thanks to its order backlog. Electric vehicle demand will also likely remain strong in 2024 as the industry continues to scale up.
Based on these factors, combined with Axcelis' ability to grow its top and bottom lines in tough economic conditions, its stock deserves a little more credit on the valuation front. I think it will likely get it in the new year.
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 Texas Instruments. The Motley Fool has a disclosure policy.
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December 18, 2023 at 12:15AM
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