Phototronics (PLAB 2.12%)a technology company involved in the manufacturing of microchips and flat-panel displays (FPDs), beat earnings-per-share estimates in its earnings release late last month — and also posted its sixth consecutive quarter of record revenue .
But this semiconductor stock is down more than 38% from the 52-week high it hit last month. Why did the stock fall and what can investors expect going forward?
The only pure photo mask company in the USA
Photronics is the world’s largest manufacturer of photomasks, the quartz photographic plates used to make miniature electronic circuits. Primarily known for their use in semiconductors, photomasks are used in a variety of high-tech products, including mobile devices, TVs, PCs, and FPDs.
Self-proclaimed “the only pure photo mask company in the US,” Photronics offers unique exposure to a global market. In fact, more than half of the company’s revenue comes from products manufactured and sold in Asia. Supporting a truly global customer base, Photronics operates from 11 strategically located facilities around the world.
The company has seen growth recently, particularly in the mobile display and integrated circuit (IC) sectors. IC revenue rose 37% year-over-year in the third fiscal quarter of 2022 (ended July 31), and FPD revenue rose 11% to $58.7 million.
Strong demand and improved pricing led to company growth in both the high-end and mainstream markets. Small and ubiquitous semiconductors can now be found in countless products. Photronics continues to adapt and innovate with new use cases for its photomask technology.
Record income and profits
For the fiscal third quarter, Photronics set new company records for both revenue and earnings. Quarterly revenue stood at $219.9 million, up 29% year over year and 8% from the prior quarter. More surprisingly, net income rose 83% from the year-ago quarter to $31.2 million.
The company’s balance sheet also strengthened as cash and equivalents rose to $381 million, with $93 million of that coming directly from operations, while debt fell nearly 50% to just $57 million.
So why are stocks down?
Although the company topped Wall Street expectations on both the top and bottom lines in its fiscal third quarter, Photronics shares fell more than 23% the day after the report was released.
The main sticking point for investors appeared to be management’s fiscal fourth-quarter guidance. The company provided a fourth-quarter revenue outlook of $205 million to $215 million — falling slightly short of analysts’ consensus of $214 million.
A significant shortage of photomasks has increased production times for Photronics, which is now facing a backlog and capacity constraints. Additionally, the company cited a slowdown in high-end customer demand in its recent earnings call, but also asserted that core demand remains robust.
These two headwinds were factored into Photronic’s guidance, and although management has kept its expectations realistic, investors were disappointed by the outlook. Accustomed to record earnings quarter after quarter from the company, has the market outperformed?
The future is still bright
Despite the recent setbacks, CFO Frank Lee asserted that Photronics is on track to have its best year ever. The company just hit a 25-year record gross margin of 38%, benefiting from cost controls, higher prices and improved operational capacity at most of its facilities.
Aware of its capacity shortfalls, Photronics has focused on expanding production volumes while keeping costs low and margins high. The company has also improved its pricing strategy to extract more value from its products.
With a healthy cash balance for expansion and investment, Photronics is determined to remain the market leader in mask manufacturing. The company has to deal with some near-term headwinds first, but this high-growth tech stock is worth checking out as a buy-and-hold opportunity.
Micah Angel has no position in any of the stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.
