Chip Equipment for Electric Vehicles Is Hot. Is This Key Small-Cap Stock a Buy? – The Motley Fool
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Axcelis Technologies has been on fire thanks to next-gen EV chips, but has the stock run too far too fast?
The electric vehicle (EV) and renewable power markets are expanding rapidly, bucking worries of recession and global economic slowdown. Companies playing an outsize role in these emerging industries have been holding up well.
But then there’s Axcelis Technologies (ACLS 3.36%), which has been doing more than holding up well. The small semiconductor manufacturing equipment stock is up 200% in the past 12 months, including a more than 100% run since the start of 2023. Thank the EV market for this massive return, and a new type of chip needed to power EVs.
A few months ago, I stuck a hold rating on Axcelis stock, ultimately preferring another name in the chip manufacturing equipment industry. Axcelis has continued its upward push and it’s time to reassess.
Axcelis specializes in a very specific type of semiconductor wafer manufacturing equipment called an ion implanter. Ion implantation is the process of introducing ions (atoms with either a negative or positive charge) of a different element into the semiconductor wafer (the disc that eventually gets chopped up into “chips”), which is usually silicon. Introducing this different element into the wafer is sometimes known as “doping.”
Axcelis and semiconductor equipment leader (by revenue) Applied Materials (AMAT -0.04%) are the two dominant powers in ion implantation machines. Both Applied and Axcelis are outperforming the semiconductor equipment niche this year thanks to sales of ion implanters. Axcelis is doing even better, though, because Applied is a big and diversified company that does a lot more than just ion implantation, and some of its other equipment types are in a temporary slump. 
Data by YCharts.
But what’s all this got to do with the EV market? Semiconductor wafer doping is an important step in crafting power management chips. This includes silicon carbide (SiC) chips, which have conductivity properties particularly well suited for the high-voltage applications needed in EVs and fast-charging infrastructure. After its last earnings report a few months ago, Axcelis put out a press release saying that SiC chipmakers in Europe and Asia keep scooping up its equipment.
Interestingly, these announcements and subsequent surges in stock price have almost mirrored what’s been going on at Aehr Test Systems, an even smaller bet on SiC chips that makes equipment to test and burn-in (the process of maturing a power chip before it gets installed in a car) SiC chips once they’ve been manufactured. Suffice it to say a lot of investors have caught wind of this SiC chip boom. 
Data by YCharts.
It’s tempting to pile on to a stock that has taken flight like Axcelis, but I’m growing increasingly cautious of the hype surrounding chips like SiC chips used in EVs.
Don’t get me wrong, I’m bullish on SiC chips, and think companies like Axcelis and Aehr have bright futures. They’re high-growth businesses, and could remain as such for years as the EV market eats up market share from traditional vehicles.
However, these are industrialists, not cloud software stocks and growth for industrial companies can be lumpy. Before chasing these hot stocks like Axcelis, take the time to understand what you’re buying, whether the price tag is fair, and how they stack up against competitors.
Axcelis stock trades for 30 times trailing-12-month earnings per share (EPS), or 26 times trailing-12-month free cash flow. Based on next year’s Wall Street analyst expectations, Axcelis trades for 22 times EPS and 21 times free cash flow.
It isn’t an egregiously expensive price tag, but I think there could be more favorable buys out there — like my favorite (yes, I’m biased), Applied Materials. Ion implantation has kept Applied on the rise this year, too, and will remain a growth driver for the giant in the coming years. And once the rest of the Applied portfolio returns to growth (expected late this year or in 2024), the whole business could be ready for a surge higher.
Applied trades for about 21 times expected EPS and free cash flow, it pays a dividend, and it repurchases lots of stock to return ample excess cash to shareholders. I believe the market is underestimating Applied’s potential once the rest of its manufacturing equipment makes a comeback.
I advise keeping Axcelis on your radar, especially if you’re looking for stocks to bet on the advance of the EV industry, but be cautious before going all-in on the stock at this juncture.
Nicholas Rossolillo and his clients have positions in Applied Materials. The Motley Fool has positions in and recommends Applied Materials. The Motley Fool has a disclosure policy.
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