Axcelis Technologies

Mihir Bhuptani, Mourik Bhattacharjee, Aaron Ahmed, Rishi Manyam, Matthew Liuzza

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Additional Help: Preston Young, Simran Seth, Richard Pilleul

TMT Sector

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Recommendation Summary

I rate Axcelis Technologies as a Buy for the following reasons:

1. Extremely Attractive Industry Dynamics and Growth
2. One of 2 companies in Ion Implantation Vertical that has a Full Family of Products
3. Patented Competitive Advantage that Allows Axcelis to Continue to Capture Market Share

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Industry: Semiconductor Manufacturing–Ion Implantation

The Semiconductor Manufacturing process is long and complex. One stage of this process is called ion implantation which is a doping method used in semiconductors that introduces impurities into a semiconductor wafer, enabling conductivity. This process offers advantages over other doping methods as it allows for optimal precision and control, helping to avoid damage. As a result, this niche vertical has rapidly grown over the last few years and has great potential in the future.

Sources: IBIS World, Gartner, ACLS Investor Presentation

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Ion Implantation is a Niche, but Fast Growing Segment in the Broader Industry

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Industry Trends

Electrification of Vehicles

• Electric Vehicle growth is one of the largest drivers of the semiconductor industry, with a CAGR of 23.64% and growing to $1.7T by 2032.
• More governments are forcing a transition off of ICE (Internal Combustion Engines) vehicles, some banning them entirely as early as 2035.
• EVs use double the chips compared to gas-powered vehicles.

The Rise of IoT and 5G

• The Internet of Things (IoT) refers to the billions of physical devices around the globe that collect and share data via the internet. IoT devices will increase demand for sensors, connectivity, memory, microcontrollers, and circuits
• The number of Internet of Things (IoT) devices worldwide is forecast to almost triple from 9.8 billion in 2020 to more than 29 billion IoT devices in 2030.
• The 5G infrastructure buildout will require many chip intensive devices (bay stations, cell towers, sensors). The Global 5G market is projected to pass $1.6T by 2030 with a CAGR of 52%

Reshoring of Chip Manufacturing

• The buildout of advanced chip making factories encouraged by the CHIP Act will create new incremental demand for chip making equipment. In addition, the CHIP act encourages domestic manufacturing among strong overseas operations.

Sources: Gartner, IBIS, Data Bridge Research

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Porter’s 5 Forces

Sources: ACLS 10k, IBIS World, Gartner

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LOW

• Very high operating costs to start production and design–dollar and intellectual cost
• Difficult to obtain exporting licenses

LOW

• The supplies they get are materials (metals, elements) which are in high quantity
• Mostly vertically integrated in their supply chain, insulating supply shocks

LOW

• Axcelis is the “best of breed” in this vertical possessing a family of ion implant products while their biggest competitor AMAT is loosely focused in this space
• Strong competitive advantage deters substitutes

MEDIUM

• Axcelis does not have an extremely fragmented customer base
• They are also especially concentrated among Samsung and SMIC

MEDIUM

• Ion Implantation vertical is dominated by two main players, Axcelis and Applied Materials, and some other smaller competitors

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Axcelis Technologies: Company Overview + Products

Sources: ACLS 10k, ACLS Investor Presentation

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Product Breakdown

• Family of Products
• One common base Purion Platform with three system attachments
• High Current Implant
• High Energy Implant
• Medium Current Implant
• Applications in Electric Vehicles, Consumer Electronics, Artificial Intelligence, 5G, and more

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Axcelis Technologies designs, manufactures and services ion implantation used in the fabrication of semiconductor chips. Their Purion family of products offers the most innovative implanters available on the market today. They sell to leading semiconductor chip manufacturers worldwide. The ion implantation business represented 97.6% of their revenue.

Company Overview

Symbol: ACLS

Market Cap: 4.15B

Enterprise Value: 3.78B

Div Yield: 0

Current Share Price: 126.2

Revenue Growth Rate: 39% → 920M

EBITDA Margin: 23% → 233M

57% Return on Invested Capital

52 Wk Low/High: 46.41-136.38

Beta: 1.7

Key Metrics FY2022

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High Growth Market with Product Differentiation

Sources: ACLS 10k, ACLS Investor Presentation

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Ion Implantation is a Superior Doping Method

• Ion Implantation is a superior doping method than other methods because of its increased precision and control
• Axcelis is one of 2 ion implant manufacturers with a full range of implant products, as well as service and support infrastructures
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Efficient Operations and Shareholder Friendly

Ribbon Method vs Focused Beam Method

• The main reason why Axcelis has been able to gain market share at the expense of their competitors is because of their patented ion implantation technology (Ribbon Method)
• Ribbon method involves a ribbon of ions being fired at a large area which is used for larger wafers
• Larger wafers are in much higher demand for Electric Vehicles and more sophisticated devices and infrastructure (5G and AI)

• Axcelis has been able to grow their ROIC from 6% to 57% over the last few years, well above industry average
• Frequent, large scale share buybacks including 100M buyback that was newly authorized

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Risk Analysis

Sources: ACLS 10k

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Situation

Mitigation

Geopolitical Tension

Cyclical Demand

Technological Competition

To limit Chinese access to chips, the U.S. imposed export controls to China, where some of their customers are based.

Chip demand fluctuates in relation to economic downturns. In poor economic conditions, consumers buy technological products in less quantity.

Currently, ACLS has had no issue obtaining licenses. Further, regulations have been for advanced logic chips, a small part of their portfolio.

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Semiconductors have become a key component in numerous industrial applications, leaving the industry less vulnerable to single retail end markets

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If Axcelis falls behind to their competitors and loses their technological edge, they will lose market share

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Axcelis has obtained over 400 patents. Other competitors are not solely focused on ion implantation, adding more security to their moat.

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Comparable Companies Analysis

Sources: Net Advantage, Yahoo Finance, Mergent

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Assumptions and Takeaway:

1. Of these companies, the only true, public competitor in this space is Applied Materials. Other companies being compared are involved in other steps in the manufacturing process and are of similar profile to Axcelis.
2. Axcelis is definitely “expensive” but their relative valuation is a product of their attractive growth prospects compared to its peers, top tier ROIC. and competitive advantages
3. Axcelis is undervalued to peers compared to its future forecasts

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Comparable Companies Analysis

Sources: Net Advantage, Yahoo Finance, Mergent

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Assumptions and Takeaway:

1. Of these companies, the only true, public competitor in this space is Applied Materials. Other companies being compared are involved in other steps in the manufacturing process and are of similar profile to Axcelis.
2. Axcelis is definitely “expensive” but their relative valuation is a product of their attractive growth prospects compared to its peers, top tier ROIC. and competitive advantages
3. Axcelis is undervalued to peers compared to its future forecasts

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Return On Invested Capital

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Takeaway:

1. Axcelis’ massive stock appreciation can be explained by their massive ROIC expansion over the last few years
2. Although growth will slow, Axcelis’ improved profitability will allow their ROIC to continue to steadily rise

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Discounted Cash Flow Assumptions

Sources: NetAdvantage, ACLS 10k

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Assumptions:

1. 1.3B Revenue Model in 2Y with > 45% Gross Margin and 26% EBIT Margin as indicated by management depending on strength of continued adoption of industry drivers such as EV/5G
2. 15% and 13% revenue Growth in ‘26 and ‘27. Based on thesis of maintaining + adding market share in growing TAM: 13% CAGR from 2019-2025. Rapid EV adoption and 5G buildout should continue these growth trends and Axcelis’ competitive advantage should allow them to continue to capture this market share away from competitors as their products align with industry dynamics
3. Stable R&D and SGA since the strategy has now shifted from development of new, groundbreaking products to incremental improvements of existing products to capture full value
4. 17X Target Multiple: Based on high ROIC, competitive advantage, growth prospects, thor elevated valuation multiple is justified

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Target Price: 167.10

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Conclusion

• Axcelis has healthy upside according to intrinsic valuation–Discounted Cash Flow
• Axcelis participates in a differentiated and fast growing industry vertical
• Provides a full family of products with distinct, patented competitive advantages
• Excellent ROIC and prioritizes increasing shareholder value

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Income Statement

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Balance Sheet

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Cash Flow Statement

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