Amkor Technology, Inc.

Moat: 2/5

Understandability: 4/5

Balance Sheet Health: 4/5

Amkor Technology is a leading provider of outsourced semiconductor packaging and test services, operating at the heart of the global semiconductor supply chain.

Investor Relations Previous Earnings Calls

The moat, understandability, and balance sheet health scores reflect a conservative evaluation to ensure a margin of safety in any assessment.

Business Overview:

Amkor Technology is a major player in the semiconductor industry, providing outsourced packaging and test services. These services are critical for companies that design and produce semiconductor devices but don’t have the capacity or desire to handle the manufacturing and testing of the chips.

  • Core Operations: Amkor’s core business revolves around packaging and testing semiconductors for a variety of end markets, including automotive, communication, computing, and consumer electronics. They utilize a complex manufacturing process, including wire bonding, flip chip, and wafer-level packaging, and perform rigorous testing of these chips.

  • Revenue Streams: The company generates revenue by packaging and testing chips for their clients. They also have income from equipment sales. Their revenues are derived from a diverse global base, with a sizable presence in the Asia Pacific region.

  • Global Footprint: Amkor has manufacturing and research facilities all over the world, including South Korea, China, Taiwan, Singapore, Europe, and the United States.
  • Industry Trends: The semiconductor industry, and Amkor’s business, are influenced by several key trends: growth in demand for AI and connected devices, the need for power-efficient high performance chips, ongoing globalization of the supply chain, the focus on sustainability, and the increasing complexity of packaging and testing. This is evidenced by the company’s emphasis on advanced packaging technologies, such as wafer-level packaging, and its increased investments in memory and power devices. The need for a complex network of manufacturers and suppliers is also on the increase which is good news for Amkor.

Competitive Landscape: The semiconductor packaging and testing industry is highly competitive, with strong pricing pressures and competition from other global outsourced semiconductor assembly and test (OSAT) providers. This industry is intensely competitive. To survive in this business you need significant scale.

-  **Key Competitors:** Major competitors include ASE Technology Holding Co. Ltd. (Taiwan), Jiangsu Changjiang Electronics Technology Co., Ltd.(China), and others, which possess significant scale and capability.  In addition, Amkor competes with its own customers’ internal production operations (vertically integrated semiconductor manufacturers), which have the ability to perform both chip fabrication and packaging/test.

-  **Differentiation:** Amkor’s key differentiators include its technology leadership, strong customer relationships, quality, and a global reach that includes many manufacturing sites. Many customers partner with them because of their cutting-edge packaging technologies, which may have applications in numerous industries including IoT and AI.
  • What Makes AMKR Unique: Amkor’s business model revolves around partnerships that provide high degrees of flexibility, customized solutions, and the ability to ramp up production efficiently for demanding customers. They also offer their customers a broad portfolio of technologies. They tend to have strong relationships with the leading players in the semiconductor industry and often are involved early on in the design phase of new chips. They also have operations located close to their customers, which reduces their supply chain time and costs.

Moat Assessment: 2/5

  • Barriers to Entry: The outsourced semiconductor assembly and test (OSAT) industry has fairly high barriers to entry. Developing a modern facility with state-of-the-art technologies requires massive investments in infrastructure and R&D (which was more than $600 million in 2022 for Amkor) which increases the difficulty of new entrants competing with major players. There are also barriers from existing customer relationships and regulatory requirements.

  • Competitive Advantage: Amkor has a narrow economic moat due to a mix of switching costs (customers are reluctant to switch when they have been working with Amkor for multiple years) and a location-based advantage. It is highly expensive for competitors to duplicate their footprint, and to replicate these sites while maintaining quality and efficiency is extremely hard.

  • Limitations: However, there are no network effects that would push their position forward. Technology improvements in the sector often get replicated, even if they are patented, and companies like them tend to compete on price. Many competitors have very similar scale and technology. The barriers to growth, though significant, are not strong enough to give Amkor a wide moat. They are also subject to a cyclicality based on the broader semiconductor market and the global economy, and this can hurt revenues.

Key Risks:

  • Cyclicality: The semiconductor industry is highly cyclical, with demand fluctuating significantly with economic cycles and changes in end market demand.

  • Technology Disruption: Technological advancements could make some of the existing packaging methods obsolete.

  • Pricing Pressures: They are also subject to severe price competition, and hence it is hard to increase prices in the case of increasing costs.

  • Dependency on Large Customers: The business relies on sales from a few large clients.

  • Geopolitical Risks: Supply chain challenges related to foreign trade regulations and political tensions, and the high amount of investment needed to keep up with the current rate of technological improvements pose a challenge.

  • Management execution risk: Any missteps in management can cause them to underperform their competition.

Business Resilience: The company has historically been good at maintaining profitability in a downturn, which suggests they have some built-in advantages. But because their margins are also reliant on scale, a big downturn can damage them. Their large customer base from a variety of different sectors is also great for resilience, since a downturn in a sector that is a customer could be offset by a growth in another sector. Finally, their diverse geographic presence also provides resilience.

Financials

  • Income Statement: AMKR’s revenue tends to fluctuate with the semiconductor industry. They are very sensitive to demand changes, and hence they can often see quite volatile results. Net income has been very positive in most recent years, but the company does need significant amounts of capital to grow, and they also have a significant amount of amortization expenses associated with previous acquisitions that reduce their operating income.

  • Balance Sheet:
    • The company has a fair amount of current assets including cash ($1.1 billion) and marketable securities ($381 million). But, there are large amounts of debt (long-term debt is at $2.3 billion), which results in a net liability of around $800 million for the company’s operations.
    • They have a high amount of goodwill of around 1.7 billion USD, and the overall amount of intangible assets is $5.8 billion as of the end of 2022. Therefore most of the capitalization is in the form of intangibles.
  • Cash Flows: The company has generated positive free cash flow in recent years with some variability due to higher or lower capital expenditures. They also have significant investments in property, plant, and equipment each year. As their growth rate is slowing, they will be more reliant on their cash flows.

Recent Concerns and Management Commentary:

  • The company has seen weakening demand in the mobile, data center, and automotive sectors.
  • They are expecting an increased demand from the AI sector for advanced packaging.
  • The focus is on cost controls and efficiency improvements due to a soft demand environment.
  • The company believes that new equipment and process technologies will help them to increase efficiency, and they are investing in these areas heavily.
  • They are also facing significant material and energy costs and are taking steps to reduce their usage in production, and looking for alternative sources.

Understandability Assessment: 4/5

Amkor Technology is relatively easy to understand:

  • They primarily offer an intermediate service in the semiconductor industry.
  • They do not deal with the complex parts of manufacturing like chip fabrication but just focus on the packaging and testing side.
  • Their revenues depend primarily on semiconductor companies.
  • Most of their operations are clear cut, but there are nuances in the specifics of their technology that might be more difficult to understand for a non-technical investor.
  • Their financials may be a little bit harder to fully understand due to the nature of their revenue streams and high amounts of intangibles.

Balance Sheet Health: 4/5

Amkor’s balance sheet is mostly healthy but has some minor concerns

  • The level of debt is higher than what would be ideal for the company (at 1.2 billion net liability at 2022 ending).
  • The total amount of goodwill and other intangible assets is also quite significant which can result in writeoffs, if not monitored properly.
  • They do seem to have a good amount of current assets that include cash and marketable securities which helps in their short-term liquidity.
  • The company is also a high capital expenditure business which does create a drag on the balance sheet.

Overall, AMKR’s business model is fairly straightforward to grasp, but their technology and processes could be very complex. They rely on the continued demand in the semiconductor sector and must maintain their capabilities to sustain growth. They currently show decent financials, with increasing revenues over the last few years. The company does have a narrow moat that is supported by a strong global presence and high customer retention rates.