Magnachip Semiconductor (NYSE:MX), a designer and manufacturer of analog and mixed-signal semiconductors, is scheduled to release its Q2 FY2024 report on July 31. The preceding Q1 report was better than expected, which seems to have halted the decline in the stock that can be traced all the way back to 2021, a positive sign that perhaps the Q2 report can build on. In fact, MX has a number of positive attributes worth noting, especially if one is or considering going long MX. Why will be covered next.
The long decline in MX has come to an end, or has it?
A previous article from last March was written after going through the Form 10-K released a week or so earlier. The numbers in the report were arguably the worst ever with MX posting steep losses, but there was some encouraging news with indications there was a pathway for MX as to how to get out of the red.
On the other hand, MX was expected to keep posting losses, certainly in the short term. This had the potential to drive the stock lower, especially since the stock remained in a downtrend that had been in place for quite some time. In the end, MX was rated a hold after taking into account both sides of the argument.
Four months have passed and MX has lost another 12% or so since the article in March. The stock even hit a new 52-weeks and multi-year low of $4.70 on April 25. The last time the stock price traded any lower was back in 2016. In comparison, the stock peaked at $26.98 in April 2021. MX thus lost as much as 82.6% of its value in three years.
However, the chart above shows how the stock has pretty much stopped declining. The stock was in a downtrend for three whole years, but MX has not added losses to the April low for close to three months and instead has gone sideways. This could be interpreted as a positive sign the stock has stabilized after a long decline, although the possibility of a renewed slide cannot be dismissed.
While the doors to both directions, up or down, remain open, the stock may be in the process of building a base from which it could attempt to regain some of the past losses. Keep in mind, MX is arguably due for a rally after spending the better part of the last three years in a downtrend. The stock closed at $4.89 on July 22 to give MX a market cap of $187.14M.
Could the upcoming Q2 FY2024 report be a catalyst for MX?
The recent stabilization in the stock would likely not have happened if the Q1 FY2024 report was not better than expected on May 2. The stock closed at $4.93 that day, which means the stock has moved just $0.04 in 2.5 months to close at $4.89 on July 22. Still, while the stock has not fallen like it did in the past three years or so, it has not rallied much either.
Another catalyst appears to be needed to get the stock going. This is why the upcoming Q2 FY2024 report on July 31 could become a catalyst to break the current stalemate. Guidance from MX calls for a small increase in revenue at $49-54M, offset by slightly worse margins at 17-19%. From the Q1 FY2024 earnings call:
“While actual results may vary, for Q2 2024, Magnachip currently expects consolidated revenue to be in the range of $49 to $54 million, including approximately $1.5 million of Transitional Foundry Services. MSS revenue to be in the range of $9.5 to $11.5 million. This compares with MSS equivalent revenue of $9 million in Q1 2024 and $12.4 million in Q2 2023.
PAS revenue to be in the range of $38 to $41 million. This compares with PAS equivalent revenue of $36.5 million in Q1 2024 and $39 million in Q2 2023. Consolidated gross profit margin to be in the range of 17% to 19%.”
Source: MX earnings call
This suggests numbers not that different from Q1 FY2024, when MX posted a non-GAAP loss of $0.28 on revenue from $49.07M. Remember though that MX has a track record of beating EPS estimates, including all the ones in the past year. If we subscribe to the notion MX tends to be conservative with guidance, which allows it to regularly beat expectations, then this is likely to happen once more when the Q2 FY2024 results are posted, especially with the bar set low. A big beat could get the stock moving higher.
Why MX could be in better shape than it appears to be at first
The main reason why the stock has fallen by as much as it has is because MX has been in the red for the last two years or so, primarily as a result of shrinking revenue. Q1 FY2024 revenue as shown in the table below was actually a record low for MX, less than half of what it was as recently as Q2 FY2022 when revenue came in more than twice as high at $101.38M.
(Unit: $1000, except for EPS) |
|||||
(GAAP) |
Q1 FY2024 |
Q4 FY2023 |
Q1 FY2023 |
QoQ |
YoY |
Revenue |
49,067 |
50,822 |
57,005 |
(3.5%) |
(13.9%) |
Gross profit margin |
18.3% |
22.7% |
21.2% |
(440bps) |
(290bps) |
Operating income (loss) |
(13,459) |
(15,935) |
(21,818) |
– |
– |
Net income (loss) |
(15,417) |
(6,040) |
(21,470) |
– |
– |
EPS |
(0.40) |
(0.16) |
(0.49) |
– |
– |
Weighted-average shares outstanding |
38,544K |
38,834K |
43,390K |
(0.75%) |
(11.17%) |
(Non-GAAP) |
|||||
Adjusted EBITDA |
(8,441) |
(9,972) |
(7,873) |
– |
– |
Operating income (loss) |
(12,559) |
(14,095) |
(12,249) |
– |
– |
Net income (loss) |
(10,884) |
(8,044) |
(10,367) |
– |
– |
EPS |
(0.28) |
(0.21) |
(0.24) |
– |
– |
Weighted-average shares outstanding |
38,544K |
38,834K |
43,390K |
(0.75%) |
(11.17%) |
Source: MX Form 8-K
However, Q2 FY2024 guidance suggests Q1 FY2024 may have been the trough, to be followed by sequential growth. It’s also worth noting that Q1 FY2024 could have grown sequentially if not for the continued phaseout of transitional foundry services, since both the Power Analog Solutions or PAS unit and the Mixed-Signal Solutions or MSS unit grew sequentially. While the headline numbers may not show it, there is underlying strength to be found at MX.
FY2024 guidance calls for a flattish year compared to FY2023, but if not for the legacy business, the numbers would look better since MSS and PAS are expected to achieve double-digit growth in FY2024.
“MSS revenue to grow double digits year-over-year as compared with MSS equivalent revenue of $44.4 million in 2023. PAS revenue to grow double digits year-over-year as compared with PAS equivalent revenue of $151.3 million in 2023. Consolidated revenue flat-to-up-slightly year-over-year as recovery in MSS and PAS is offset by the phase-out of Transitional Foundry Services.
Consolidated gross profit margin between 17% to 20%, primarily as a result of the impact of idle capacity expected from the phase-out of Transitional Foundry Services. This compares with the consolidated gross profit margin of 22.4% in 2023.”
MX ended with a GAAP loss of $36.62M or $0.90 a share and a non-GAAP loss of $22.47M or $0.55 a share on revenue of $230.05M in FY2023. FY2024 is unlikely to be much better, and earnings probably worse due to lower margins, but an argument can be made that MX is in better shape than it appears to be based on the headline numbers, especially if one strips out the fleeting impact of the Transitional Foundry Services.
Why MX is worth taking into consideration
MX has been badly affected by a shrinking top line, so a return to growth in the top line is important. This could happen as soon as next year in FY2025. Getting out of the red would require more time, but growth in the bottom line should return as long as the top line continues to grow. Keep in mind, getting out of the red could be a game changer for MX in terms of how it is valued.
MX currently has a book value of $321,885K or $321.89M with total assets of $426,164K and total liabilities of $104,279K as of the most recent report or Q1 FY2024. This converts to a book value of about $8.41 a share with the number of outstanding shares at 38,263,642. MX therefore trades far below its book value, with a price-to-book of 0.58x and a stock price of $4.89.
An argument can be made that MX is undervalued due to this. MX is also valued at 0.86 times sales with TTM sales of $218.12M and a stock price of $4.89 or a market cap of $187.14M. This market cap of $187.14M is not much higher than the $171.6M or $4.48 a share of cash and cash equivalents on the balance sheet.
Granted, MX is still in the red and that will reduce book value in FY2024 and FY2025 likely as well, but MX has a lot of leeway being valued $134.75M below book value. In comparison, MX incurred a $30.57M GAAP loss TTM. MX could on paper spend several years incurring the same amount of TTM losses, and MX would still trade below book value.
However, if we assume MX keeps growing by double digits, excluding business units to be discontinued, MX should eventually be able to earn a profit. This could potentially happen as soon as FY2026. In contrast, a stock price of $4.89 seems to price in a more difficult path towards profitability, which is why MX trades so far below its book value.
MX has done very poorly in recent years, so there may be a lot of pessimism MX will have to overcome. This is where the upcoming Q2 FY2024 report could make a difference. An upbeat report could help clarify the path towards getting back to being profitable. MX needs to show the market it does not deserve to trade so far below its book value and why the current stock price overestimates the amount of losses expected before MX gets back to being profitable.
Is MX laying the foundation for a turnaround?
It has been costly, and it has contributed to recent losses, but MX has developed new products and new ones are in the immediate pipeline. New customers are being added. The Q1 FY2024 report, for example, mentions that MX has signed up a top smartphone OEM in China for an OLED DDIC chip. MX is working on a transition and if this is to succeed, all these new products will be needed to win orders to drive a turnaround.
Speaking of China, MX has opened a new subsidiary in China. The subsidiary is to help drive growth in China, but also to make MX more resilient to possible trade tensions that may erupt in the near future, especially between the U.S. and China. MX after all has good reason to be mindful of trade tensions after the aborted acquisition of MX a few years ago paved the way for the situation it finds itself in.
One thing the market will be looking for is how much progress MX is making in the market, whether customers or products. MX is in the red, but more customers should translate to increased sales and growth, which brings profitability closer to within reach. MX seems to be making progress in this regard, although it is too early to tell how much it will translate to the bottom line.
Investor takeaways
The stock has lost 34.8% YTD, but it has been essentially flat the last 2.5 months after the last or Q1 FY2024 report showed progress in several areas. There were a number of positive developments, enough to halt a long decline in the stock, but the key highlight was arguably that there is growth to be found at MX, especially if one excludes the receding impact of the foundry business.
A shrinking top line greatly affected MX, which in turn is the main reason why MX is running at a loss. So it is crucial that revenue returns to growth again. If MX can achieve this and keep it this way, MX should get out of the red over time. However, one quarter does not make a trend and MX will need to show Q1 FY2024 was not just a flash in the pan.
This is where the Q2 FY2024 report on July 31 can be a catalyst in either direction. The stock has gone flat for months, but if MX can show it has a clear path towards returning to sustained profitability, then the stock may finally start to recoup the losses it has accumulated since peaking in early 2021. On the other hand, a weak report could resume the slide in the stock.
The key for MX is that it shows growth is back. The Q1 FY2024 report was not a fluke, but the start of a new trend. MX has to remove all doubts that it is still subject to contraction like before and show that sales are growing sustainably. It is not necessary to get out of the red immediately. As long as MX can show growth has returned, the market will assume losses with fade with a sustained expansion of the top line. If MX can achieve this, perhaps as soon as with the Q2 FY2024 report, the stock has a chance to go on a rally that is long overdue.
MX is a highly speculative play, but I am bullish on MX with how the cards are currently laid out. Growth may still regress, and longs should expect continued losses in FY2024 and likely FY2025 as well, but MX seems to be on the right path. The core business is no longer shrinking like before. The chart patterns are also no longer leaning bearish like before, and one could even argue they are leaning bullish, especially if a base is indeed being built.
If growth takes off next year, including with the aid of new products in the pipeline, which would pave the way for a possible return to profitability in FY2026, then an argument can be made that MX is undervalued with the stock valued at just 0.58 times book value. If MX suffers less losses than the stock has priced in, then the stock needs to be revalued accordingly. Any valuation change would have to account for less losses before MX is profitable again.
With that said, MX comes with a fair amount of risk, which anyone who intends to go long needs to be aware of. MX is a stock with some obvious flaws that need to be corrected. MX is undergoing a transition, but this transition could still get derailed if, for instance, customers do not increase demand as much as expected to power double-digit growth in PAS and MSS. MX has assigned a key role to China to power a turnaround, but this could expose MX to geopolitical tensions. A successful transition is possible, but by no means guaranteed.
Bottom line, while the stock has flat lined in recent months, this is unlikely to continue as long as the main business units, MSS and PAS, continue to grow at a double-digit clip and the foundry unit continues to fade in impact. If the former gets MX out of the red, then it is hard to see how MX can continue to be valued at a fraction of book value. Chances are this will change.
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