TipRanks Smart Growth Newsletter #1: Clean Edge
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Dear Investors,
Welcome to our brand new TipRanks Smart Growth Newsletter.
Through the Smart Growth Newsletter, we aim to provide you with high-potential investment insights to support your growth strategy. Each week, our analysts will identify cutting-edge companies positioned to capture market share and deliver exceptional growth, giving you unique insights in a dynamic investing landscape.
Stocks we recommend have been carefully analyzed and vetted, using TipRanks data, ensuring you receive well-researched, high-potential opportunities aimed at delivering substantial, long-term growth. We will present you with a comprehensive analysis that outlines our selection process, giving you clear insights into why each stock stands out as a top growth opportunity.
With that in mind, let’s dive into this week’s top pick and explore why it could be a valuable addition to your Growth portfolio.
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This Week’s Top Growth Pick: ACM Research (ACMR)
ACM Research, Inc. specializes in developing and manufacturing advanced wafer processing solutions for semiconductor production, focusing on single-wafer wet cleaning and electroplating technologies.
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Here’s Why ACMR’s Stock Is Likely to Grow:
❖ Innovative Edge: ACMR’s advanced wafer-cleaning tech has earned it a leading position in its market.
❖ Laser-Focused Strategy: By investing in specialized innovations, ACMR can address specific needs of chip manufacturers with precision.
❖ Responsive Agility: ACMR can quickly respond to customer demand, operating with lower overhead.
❖ Protective Moat: The unique results of ACMR’s heavy R&D investment are protected by numerous patents.
❖ China’s Demand: ACMR’s strong position in China allows it to capitalize on the country’s push for chip self-sufficiency.
❖ Expansion and Diversification: By expanding globally, ACMR aims to reduce its concentration risks, with its long-term goal of splitting revenue between China and the rest of the world.
❖ Financial Momentum: Rapid growth and robust earnings underscore ACMR’s upward trajectory.
❖ Ambitious Goals: ACMR aims to grow its revenue fivefold in the long term, replicating its growth surge from the previous five years.
❖ Growth & Value Opportunity: ACMR’s current valuation hints at a potential bargain. Meanwhile, leading analysts see strong potential upside for the stock.
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Key Aspects of ACMR’s Technology
ACM Research specializes in developing advanced equipment for cleaning silicon wafers, an essential step in semiconductor production. Its technologies aim to improve chip quality and manufacturing efficiency, serving key sectors such as AI, 5G, and automotive. The company’s proprietary methods—Space Alternated Phase Shift (SAPS) and Timely Energized Bubble Oscillation (TEBO)—offer precise cleaning capabilities that help maintain high chip performance by removing particles and impurities.
SAPS uses alternating megasonic waves to clean wafer layers delicately, making it suitable for older chip technologies and memory chips like DRAM and NAND. TEBO employs micro-bubbles to clean deep wafer structures, catering to advanced applications requiring ultra-clean surfaces, such as AI and 5G chips. Both methods enhance reliability by addressing hard-to-clean areas effectively.
ACMR also offers the Ultra C Tahoe system, which combines batch and single-wafer cleaning while cutting sulfuric acid consumption significantly. This system supports a variety of semiconductor applications with high-efficiency cleaning for both advanced and mature technologies.
Beyond cleaning, ACMR provides tools for electrochemical plating, thermal processes, lithography, and packaging applications. The company dedicates about 10% of its revenue to R&D, driving innovation and securing over 500 patents globally. Recent developments include the Ultra C bev-p bevel etching tool, which supports advanced semiconductor packaging.
Although ACMR offers a broad range of solutions, its cleaning technologies generate over 75% of its revenue, reinforcing its strong niche position in the semiconductor manufacturing process.
Source: ACMR Investor Presentation
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Unique Tech and Barriers to Competition
ACM Research competes with major semiconductor equipment firms like Applied Materials, Lam Research, and Tokyo Electron, all of which offer advanced wafer-cleaning solutions. While these companies provide a wide range of semiconductor tools, ACMR sets itself apart by focusing exclusively on wafer-cleaning technology, investing in specialized innovations like SAPS and TEBO that address specific cleaning needs of chip manufacturers.
As a smaller, agile company, ACMR operates with lower overhead and can quickly respond to customer demands, prototyping and customizing solutions faster than larger competitors. This approach has been successful with Chinese clients and positions the company to meet unique requirements in other markets. Additionally, its proprietary technologies have produced outstanding results, which may reduce hesitation among new clients considering ACMR’s equipment over other options.
ACMR’s patented cleaning methods offer protection against replication, giving it a competitive edge in this niche market. While larger firms could develop similar technologies, the unique scientific principles involved take years to refine and scale effectively, presenting a significant barrier. Looking ahead, the company’s specialization, agility, and intellectual property protection are expected to help it maintain a solid position against much larger competitors.
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China: Risks and Opportunities
Founded in California in 1998, ACM Research expanded into the Chinese market through a joint venture in Shanghai in 2005, driving growth with manufacturing hubs in Shanghai and Wuxi. Today, China remains its largest production base and revenue source, supported by strong demand as the country pursues semiconductor self-sufficiency. Major Chinese clients like YMTC and SMIC have cemented ACMR’s role as a key supplier.
According to Morgan Stanley’s analysis, ACMR benefits from China’s investment in memory and mature node production, where its cleaning technologies play a critical role. While current U.S. export restrictions allow ACMR to operate freely in China, the company acknowledges potential risks from future regulatory changes.
To mitigate these risks, ACMR is diversifying its customer base. New orders from SK Hynix in South Korea and Intel in the U.S. highlight its efforts to expand internationally. The company has also opened a U.S. sales and service hub in Oregon and is building a manufacturing facility in South Korea, set to produce up to 200 tools annually by 2025. While growth remains heavily reliant on China, these steps aim to reduce geopolitical risks and broaden ACMR’s global footprint.
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Financials Support Fast Growth
Unlike most growth stocks, ACM Research maintains a strong balance sheet with low leverage and more cash than debt, providing liquidity for short-term needs. However, its growth-focused strategy, including significant R&D and facility investments, results in negative operating cash flow as the company prioritizes scaling to meet industry demand. Recent international expansion has added to these capital requirements.
Profitability metrics remain competitive within the small-cap semiconductor space, with ROE, ROA, and ROIC outperforming most peers despite the capital-intensive nature of the industry, signaling effective capital use to drive growth. The company’s gross, operating, and net margins are strong, reflecting effective pricing and cost management, though FCF margin remains under pressure from continued investments.
ACMR’s revenue grew at a 54% CAGR over the past three years, with EPS rising at 40% CAGR since first turning positive in 2019. This momentum continued into 2024, despite a Q2 2024 dip in EPS due to higher operating expenses. Earnings-per-share increased by 43% in the first nine months of 2024, with revenue up over 44% year-over-year. Q3 2024 results showed record revenue, improved margins, and positive cash flow, prompting the company to raise its full-year revenue growth outlook to 32% at the midpoint of guidance versus the previous outlook of 28% full-year revenue growth.
While ACMR hasn’t provided specific EPS guidance, analysts expect strong growth ahead, driven by better efficiency, economies of scale, and reduced expansion costs. Underscoring its growth and diversification ambitions, the company has set a long-term target of achieving annual revenue of $3 billion, with only half of that revenue originating from China.
With a track record of consistently surpassing analyst estimates and growing its revenue more than fivefold over five years, the goal of a similar expansion rate in the next five to ten years looks challenging but achievable.
Source: ACMR Investor Presentation Q3 2024
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Growth at a Reasonable Price
ACMR’s current valuations suggest it may be priced attractively compared to its peers in the semiconductor equipment industry. Its 13.8x Forward PE represents a significant discount to the broader Technology sector average, while its Forward PS ratio of 1.6x is notably lower than its peers and the sector median. These figures indicate the market might not fully appreciate ACMR’s potential.
Additionally, the company’s Forward EV/Revenue and EV/EBITDA ratios are below industry averages, pointing to possible undervaluation based on expected revenue and operating earnings. This cautious pricing may reflect investor concerns over ACMR’s exposure to China and uncertainties around trade regulations. However, these lower multiples could present an opportunity to buy into rapid growth at value price, provided the company continues to scale successfully and execute its diversification strategy.
ACMR holds a “Strong Buy” rating from TipRanks-scored leading Wall Street analysts, with an average price target suggesting potential upside of almost 75% within the next year.
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To Sum It All Up
ACM Research’s advanced wafer-cleaning technologies make it a strong player in semiconductor manufacturing. The company benefits from competitive gross margins, proprietary technology, and substantial revenue from high-growth markets, particularly in China. However, its reliance on the Chinese market introduces risks, including potential trade restrictions.
ACMR’s capital-intensive approach, driven by significant R&D and expansion investments, places pressure on margins and results in negative cash flows. However, these high costs are justified by past strong growth rates and the expected continued earnings expansion, as ACMR’s international expansion, customer diversification, and high demand in semiconductor applications like AI and 5G offer substantial growth potential.
The low valuation multiples suggest that ACMR is undervalued compared to its peers, indicating a significant buying opportunity for growth-focused investors, provided it continues to deliver on its growth strategy and manage geopolitical risks effectively.
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Click here for more stock analysis from TipRanks Macro & Markets research analyst Yulia Vaiman
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