Axcelis Technologies, Inc. (ACLS) in Beverly, Mass., and Fremont, Calif.-based AXT, Inc. (AXTI) are two lesser-known players in the semiconductor industry. With a market capitalization of $1.67 billion, ACLS designs, manufactures, and services ion implantation and other processing equipment used to fabricate semiconductor chips globally. In comparison,  AXTI manufactures and distributes compound and single-element semiconductor substrates using its proprietary vertical gradient freeze technology. It has a market capitalization of $416.57 million. Both companies sell their products through direct sales channels internationally.

Amid a global semiconductor chip shortage, rising demand from several industries, including automotive and consumer electronics, has increased chip prices. Furthermore,  in the second quarter of 2021, worldwide semiconductor sales increased 29.2% year-over-year. To address the problems caused by the shortage, governments and corporates worldwide are investing to boost semiconductor production. And the U.S. Senate has passed a landmark bill that includes $52 billion in planned spending to increase domestic production of semiconductors.

The global semiconductor market is expected to grow 25.1% to  $551 billion in 2021. Given the favorable industry backdrop and the prevailing low-interest-rate environment, small-cap stocks ACLS and AXTI should benefit.

While AXTI’s shares have lost 32.5% in price over the past six months, ACLS has surged 22.3%. ACLS is a clear winner with 26% price gains versus AXTI’s negative returns in terms of their past month’s performance. But which of these stocks is a better pick now? Let’s find out.

Click here to checkout our Semiconductor Industry Report for 2021

Latest Developments

On July 21, 2021, ACLS announced the first shipment of its  Purion EXE Power Series SiC high energy system to a new customer in China. ACLS is looking forward to offering new and innovative implant solutions to chipmakers by serving the rapidly growing power device market segment with its Purion Power Series platform's common and flexible architecture, coupled with its uniquely differentiated silicon carbide process capabilities.

In an announcement on  April 28, AXTI said it had developed and shipped its first 8-inch diameter gallium arsenide (GaAs) substrates to a major customer. The material quality, scalability, and low defect rates of these wafers demonstrate AXTI’s commitment to excellence and the differentiation of its VGF crystal growth process. AXT has received significant interest from several customers due to the development of high-volume applications and expected high demand for 8-inch GaAs wafers in the coming months.

Recent Financial Results

For its  fiscal second quarter, ended June 30, 2021, ACLS’ total revenues increased 19.8% year-over-year to $147.27 million. The company’s gross profit came in at $64.01 million, up 23.3% from the prior-year period. Its income from operations increased 46.5% year-over-year to $24 million. While its net income increased 42.1% year-over-year to $18.91 million, its EPS increased 41% to $0.55. As of June 30, 2021, the company had $219.73 million in cash and cash equivalents.

For its fiscal second quarter, ended June 30, 2021, AXTI’s revenues increased 52.4% year-over-year to $33.74 million. The company’s gross profit came in at $12.24 million, up 80.8% from the prior-year period. AXTI’s income from operations was $3.91 million for the quarter, representing a 717.2% year-over-year increase. ACLS’ net income was  $4.39 million, up 1114.7% from the prior-year period. Its EPS increased 900% year-over-year to $0.10. The company had $52.78 million in cash and cash equivalents as of June 30, 2021.

Past and Expected Financial Performance

ACLS’ EBITDA and tangible book value have grown at CAGRs of 6.1% and 8.6%, respectively, over the past three years.

Analysts expect ACLS’ EPS to increase 132.3% year-over-year in the current quarter, ending September 30, 2021, 74.4% in the current year, and 24.1% next year. Its revenue is expected to grow 54.1% year-over-year in the current quarter, 31.8% in the current year, and 10.4% next year. The stock’s EPS is expected to grow at a 20% rate over the next five years.

In comparison, over the past three years, AXTI’s tangible book value has grown at a 1.8% CAGR, and its EBITDA declined at a 7.6% CAGR.

AXTI’s EPS is expected to increase 450% year-over-year in the current quarter, ending September 30, 2021, 471.4% in the current year, and 25% next year. Its revenue is expected to grow 37.6% year-over-year in the current quarter, 41.5% in the current year, and 10.3% next year. Analysts expect the stock’s EPS to increase at a 10% CAGR over the next five years.

Profitability

ACLS’ trailing-12-month revenue is almost 4.4 times AXTI’s. ACLS is also more profitable, with a 43.2% gross profit margin versus AXTI’s 35.5%.

Also, ACLS’ ROE, ROA, and ROTC values of 13%, 7.2%, and 8.6%, respectively,  compare favorably with AXTI’s 5.3%, 2.7%, and 3%.

Valuation

In terms of non-GAAP forward PEG, AXTI is currently trading at 1.55x, which is 63.2% higher than ACLS’ 0.95x.

In terms of forward EV/Sales, AXTI’s 3.36x is 27.8% higher than ACLS’ 2.41x.

POWR Ratings

While AXTI has an overall D grade, which translates to Sell in our proprietary POWR Ratings system, ACLS has an overall B grade, equating to Buy. The POWR Ratings are calculated considering 118 different factors, each weighted to an optimal degree.

ACLS has a B grade for Value, which is consistent with its lower-than-industry valuation ratios. ACLS’ 14.03x forward EV/EBIT is 31.8% lower than the 20.58x industry average. However, AXTI’s C grade for Value reflects its relatively higher valuation compared to its peers. The company has a 23.37x forward EV/EBIT, which is 13.6% higher than the 1.91x industry average.

In terms of Quality, ACLS has been graded a B, in sync with its higher-than-industry profitability ratios. ACLS has an 11.9% trailing-12-month net income margin, which is 97.6% higher than the 6% industry average. However, AXTI’s F grade for Quality is in sync with its negative trailing-12-month levered free cash flow margin.

Of the 99 stocks in the B-rated Semiconductor & Wireless Chip industry, AXTI is ranked #86, while ACLS is ranked #16.

Beyond what we’ve stated above, our POWR Ratings system has also rated ACLS and AXTI for Growth, Stability, Sentiment, and Momentum. Get all ACLS ratings here. Also, click here to see the additional POWR Ratings for AXTI.

The Winner

Massive government and corporate investments, along with surging demand from various industries, should enable both ACLS and AXTI to achieve  substantial growth in the coming months. However, we think its higher profitability and lower valuation make ACLS a better buy here.

Our research shows that the odds of success increase if one bets on stocks with an Overall POWR Rating of Buy or Strong Buy. Click here to access the top-rated stocks in the Semiconductor & Wireless Chip industry.

Click here to checkout our Semiconductor Industry Report for 2021

ACLS shares were unchanged in after-hours trading Thursday. Year-to-date, ACLS has gained 71.15%, versus a 22.01% rise in the benchmark S&P 500 index during the same period.

Sweta is an investment analyst and journalist with a special interest in finding market inefficiencies. She’s passionate about educating investors, so that they may find success in the stock market.

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