Amkor Technology

Moat: 2/5

Understandability: 2/5

Balance Sheet Health: 4/5

A semiconductor packaging and test services provider, Amkor Technology plays a vital, yet often unseen, role in the tech supply chain by transforming raw semiconductor wafers into finished devices ready for use in electronics.

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.

Amkor is not a semiconductor manufacturer, but a provider of outsourced semiconductor assembly and test (OSAT) services, making them an important partner to chip designers and manufacturers, or foundries. This makes it a unique business that doesn’t manufacture the chips themselves but is needed to bring those chips into production.

Business Overview

Amkor Technology (AMKR) is one of the world’s largest providers of outsourced semiconductor assembly and test (OSAT) services. The company doesn’t produce semiconductors itself, but instead provides services that enable other companies to take silicon wafers (raw material for chips) and package and test them into usable components. These services are crucial to the semiconductor supply chain, as even a highly sophisticated chip is useless without the proper package and testing before being placed on a motherboard.

These services are also known as “back-end” manufacturing.

  • Revenue Distribution: Amkor primarily operates within two key segments:
    • Advanced Products: This segment includes advanced packaging technologies such as flip chip, wafer-level packaging, and 2.5D/3D packaging. These technologies are used in advanced devices that require high performance and miniaturization, such as smartphones, high-performance computing, and automotive electronics. This is a higher margin business, and is the key to competing in this industry.
    • Mainstream Products: This segment includes traditional packaging technologies such as leadframe and wire bonding. These technologies are used in less complex and price-sensitive applications like consumer electronics and basic automotive electronics. This has lower margins compared to the advanced products segment, but provides more consistent revenues.
  • Industry Trends:

The demand for advanced packaging solutions is growing rapidly as devices become more powerful, smaller, and more efficient. This trend favors companies with expertise in complex and high-density packaging technologies. With more and more use of technology, demand for semiconductors is expected to keep rising, leading to higher volume in the industry. * Geopolitics and Supply Chain: The industry has been shifting towards more regionalized and secure supply chains due to national security and political pressure, which leads to increased capital expenditure among companies operating outside of China. Due to trade tensions, China’s domestic chip manufacturing has also increased, leading to a new geographic market for Amkor.

Increasing chip content in various industries, such as automotive and IoT, has been a major tailwind in their revenues. * Shift to Advanced Packaging: There is a strong trend towards advanced packaging techniques to enable higher performance, better power usage, and smaller footprints.

  • Margins: Operating margins for advanced products are significantly higher than mainstream products due to more differentiated processes and stronger pricing power.

  • Competitive Landscape:
    • The OSAT industry is relatively consolidated, dominated by a few large players such as Amkor, ASE, and SPIL. A limited number of companies with scale, deep pockets, technology, and strong customer relationships mean that not many companies can compete.
    • Competition is fierce, based on both price and technology, and companies are required to continuously innovate to maintain an edge. The industry is also highly cyclical, with overcapacity arising and leading to lower margins and profitability.
  • What makes AMKR different:

Amkor is focused on providing a diverse range of packaging options, from the most basic to some of the most advanced, giving a holistic platform to large semiconductor clients. * They have been focused on expanding their presence outside of China, giving some protection to companies looking to minimize risk in the current geopolitical environment. * They also focus on improving technology to help customers create higher value in the back-end of their manufacturing processes.

Financials Deep Dive

All financial numbers are from their latest earning calls and financial reports, if not specified otherwise.

  • Revenues:
    • The company’s total revenue was $6.8 billion in 2023, down 12% YoY. In the latest quarter in the first quarter of 2024, the company reported revenue of $1.52 billion.
    • They are expecting $1.6 to $1.7 billion in revenues in the next quarter.

This is mainly because of industry-wide weakness in the chip market that is now recovering.

  • Margins and profitability:
    • Gross margins were at 13.8% in 2023, and a profit margin of 0.8%. They have guided for gross margins of 12-14% in the next quarter.
    • Operating expenses are about 7% of the total sales, which is low, but has resulted in an increase in profits for the quarter.
    • The company’s profitability is tied to the semiconductor cycle and as the cycle improves, so should its profitability.
  • The company has struggled with maintaining profitability, with high capex and costs, but they seem to have been focused on improving costs, which can improve profitability in the long term.
  • Capital Expenditures: AMKR has been a high capex business. From 2021 to 2023, it had around $1.9B+ in yearly capital expenditure to grow capacity and capability. This number is down in the past year. With the improvement in market demand, they are expected to increase capital expenditure to capture future demand.
  • Cash Flow: Free cash flow was negative $621M in 2023, as they had a high amount of capital expenditure. They have guided free cash flow to be positive in 2024.
  • Balance Sheet:
    • The company holds $1.3 billion in cash and short-term investments. Long-term debt is $2.1 billion. The debt to asset ratio is 31%.

With relatively low amounts of debt, and high cash position, the company is financially strong. This also gives them room to invest more into R&D and expand capacity.

  • Recent Problems/Concerns:
    • AMKR has recently announced an underperforming 2023, and is navigating a slowdown in its consumer business while seeing high demand in the automotive market. They have mentioned this has impacted the company’s financials, in the near term, but they are positive about the long term.
    • The company has a relatively high investment rate and has negative free cash flow because of it, which may worry investors looking for immediate returns.
  • Future Outlook:
    • Management seems optimistic about the future of semiconductor growth, seeing large potential for growth in automotive, advanced packaging, and even traditional markets.
    • They are guiding for revenue growth in the coming quarters and the full year.
    • They are focusing on increasing gross margins to reach at least 15% as well as lowering capex, which will lead to increased profitability.
  • They intend to capitalize on industry tailwinds by increasing capital allocation into leading-edge technologies and by expanding geographical diversity to lower the risk from specific regions like China.

Moat Rating: 2/5

AMKR’s moat is relatively narrow.

  • Intangible Assets: The company has some degree of intellectual property and know-how related to its manufacturing processes, as it is a high tech and specialized industry, but the lack of patents makes this moat weak.
  • Switching Costs: While they have strong relationships with their clients, there are usually alternative options from competitors, although switching will be complicated and may take time for the customer. Thus, switching costs are moderate.
  • Network Effect: Not applicable.
  • Cost Advantages: Amkor operates in a low-cost region, but this is easily replicable, as evidenced by the other major players. Although scale might give some cost advantage, it’s not unique or very strong.

Risk Factors

  • Technological Obsolescence: The OSAT industry is highly dynamic and is constantly evolving, making it imperative to invest into R&D. It is a risk that AMKR may fall behind as technology changes.
  • Pricing Pressures: The industry is often subject to fierce price competition, where customers may prefer another provider for a better price, hurting AMKR.
  • Geopolitical Risks: Increased tensions could have a large impact on supply chains, with sanctions, tariffs, or import/export restrictions and make it difficult for the company to operate.
  • Economic Cyclicality: Semiconductor demand has traditionally had boom and bust cycles, with each down cycle leading to lower margins and profits. This can be challenging to navigate.
  • Dependence on a few big clients: Much of their revenue is dependent on a few major chip manufacturers. These customers can change their supply chain or try to play companies against each other for better pricing.

Business Resilience

AMKR can recover from difficult times due to its essential role in the global supply chain. They have worked closely with their customers to grow and provide essential services, and it is not an easy or cheap task to replace an OSAT provider. The company also seems very focused on the future, by investing heavily into capex to scale their capacity, and also into new technology to serve the most advanced needs of the market.

Understandability: 2/5

Although the business is complex, its fundamental parts are easy to understand: * They provide packaging and testing services. * These are necessary for most major chip makers. * Their business is mostly driven by the chip cycle and industry growth. However, understanding nuances of technology and financial reporting makes this a step more difficult. Furthermore, there may be a lack of information on a variety of contracts and operations, making it slightly challenging to understand exactly where the money is coming from.

Balance Sheet Health: 4/5

AMKR’s balance sheet is healthy, with a solid cash balance and a manageable debt load relative to its assets. The company seems to be focused on long-term financial strength by continuously growing earnings and revenue.