2 Metrics to Value a Semiconductor Stock

Recently, ASM Pacific Technology Ltd (SEHK: 522) released its first-quarter 2020 results.

By way of introduction, ASM is a global technology and market leader in the semiconductor industry that mainly engages in developing and providing leading edge solutions in surface mount technology (SMT), equipment and materials for the semiconductor assembly and packaging industries.

Its solutions cover a wide range of end-user markets including electronics, mobile communications, automotive, industrial and LED.

As I’ve mentioned previously, China continues to accelerate its global presence as a technology superpower. ASM is then considered as another potential key player and beneficiary from China’s aggressive 5G expansion plan.

Latest financials

The company’s financials have been heavily impacted from US-China trade war and now the coronavirus outbreak. ASM announced a quarter-on-quarter drop of 24% in sales, 65.4% in operating profit margin, and a 88.6% in net profit.

Earnings per share (EPS) declined from 0.53x in Q4 2019 to only 0.06x in Q1 2020. Also, its 12-month trailing price-to-earnings (PE) ratio is 26.08x. This figure is still relatively high as compared to industry PE average of 16.35x.

Despite the company’s financial results coming in above consensus estimates, investorws have heavily focused on the reduction of the company’s profitability figures. They downgraded the stock from hold to buy.

Personally, I think there are other metrics that have been overlooked and I am going to list out two below that should mean the company will remain resilient.

Book-to-bill ratio

First, we are going to look at their Book-to-bill (BB) ratio. For anyone who’s not familiar with the semiconductor industry, the BB ratio is the ratio of orders received to units shipped and billed for a specified period, generally on a monthly or quarterly basis.

The ratio is especially widely used in the semiconductor equipment sector. A ratio above one indicates strong demand.

ASM Pacific

Source: ASM Investor Relations

In ASM’s Q1 2020 financial release, the BB ratio grew by 50.6% from 0.78x in Q4 2019 to 1.54x. The company’s quarterly new orders (bookings) were up 50.2% quarter-on-quarter from US$445.2 million to US$668.9 million, as we see double digit growth from all three business segments.

The robust figures were mainly attributable to the acceleration of 5G infrastructure deployment in China, localisation of the China semiconductor supply chain, recovery of the LED market, and the group’s strong advantage in advanced packaging technologies.

By multiplying the BB ratio with the number of new orders, I derive the current value of the company’s current backlog orders – which is US$883 million. That’s a 36% increase as compared to a backlog of US$445.2 million in 4Q2019.

This substantial increment in sales backlog indicates positive signs for the business, as it shows a higher level of customer demand as well as future financial stability amid disruptions from Covid-19.

The company also expects to capture more new market opportunities to drive greater bookings by differentiating their product solutions to new and existing customer base. This may increase shareholders’ confidence in the company’s long-term sustainability as a profit-making business.


Another metric that I would like to dive into is the EV/EBITDA ratio of ASM. Essentially, the PE ratio is created by market perception.

As macroeconomic factors have increased the sensitivity to the company’s stock volatility, EV/EBITDA might be a good measurement to replace the PE ratio in times of trough cycles.

Also, EV/EBITDA might be a better valuation metric to look at given the semiconductor industry is considered to be relatively capital intensive.

EV/EBITDA measures the payback period of your investment by factoring in the company’s debt as well. It indicates the number of years that it takes for your investment to be recovered from EBITA-generated by the company. Essentially, the lower the EV/EBITDA, the more attractive is the company.

Source: Guru Focus

ASM’s latest EV/EBITDA is at 17.31x. According to the above, excluding the outliers, ASM’s current EV/EBITDA lies lower than industry peers’ average of 19.81x. This suggests that the overall worth of the company per dollar of earnings is in line with the industry benchmark and is therefore worth investing in.

Foolish conclusion

I hope by looking the company’s latest financials through a different lens, you may gain some new findings and deeper insights to the company’s true value.

Hopefully this will help determine whether this company should be one of the potential stocks you would consider adding to your portfolio.