Advanced Energy Industries ($AEIS)

Rating: STRONG BUY

Prepared by Robert Ota (April 1st, 2021) Not investment advice.

Investment Thesis: AEIS is a supply chain beneficiary stock with opportunistic exposure to four synergistic growth markets- hyperscale data centers, semiconductors, medical devices and telecommunications. AEIS’s largest revenue increases are likely to come from the “V” shaped recovery of investments in the semiconductor industry as well as the transition to 48v power shelves in the hyperscale data center industry.

Bottom-up revenue analysis:
Semiconductors:
This is AEIS’s largest revenue vertical providing 43.3% or $611.8 million of 2020 revenue. Y/y revenue vertical growth of 51%. AEIS’s two largest clients Applied Materials and Lam Research produce equipment needed for manufacturing semiconductors- these two customers constituted 17.5% and 10% of AEIS’s total revenue. As these customers are huge revenue streams, their success is a leading indicator of AEIS’s success.

Visual representation of value chain:

Applied Materials (Amat) increased their market share in 2020 from 15.9% to 16.4%. Amat also just issued a $7.5B share buyback signifying the board thinks the company is undervalued compared to its growth prospects.

Further down the value chain this bullish sentiment is evident when looking at the chip producers themselves. Intel (10% of Amat’s rev.), just announced a $20 billion dollar investment into a chip production facility in Arizona. Taiwan Semiconductors (18% of Amat’s rev.), has continually boasted ROE of greater than 15% for the last 18 years. Samsung (18% of Amat’s rev.) just announced a $17 billion dollar investment in the USA chip production. Lam Research (Lam) research, the second largest revenue stream for AEIS, also has great exposure to Samsung’s performance as well as Micron Tech.’s performance. Today Micron Tech. released earnings, but noted a more conservative CAPEX spending than their industry counterparts.

The overall “V” shaped recovery from 2019 looks to be continuing through 2021. These upchain investments will all transitively affect AEIS as the cash flows through the above supply chain.

Hyperscale Data Centers:
AEIS entered this revenue vertical completely inorganically from its 2019 acquisition of Artesyn. In 2020 the data center and computer market provided 22.8% of net revenue. Y/y growth in the revenue vertical was 71% (primarily driven by full year results of Artysen acq.). Growth in this vertical is driven by the need for hyperscale data centers to provide cloud computing.

The clear opportunity in this revenue vertical is the shift from 12v to 48v power shelves used in these large data centers. This transition is prompted by the 16X energy cost savings of a 48v power shelf unit compared to a 12v unit. To give a general idea of how much energy costs consist of the total opex of a hyperscale data center, the hyperscale data center industry consists of 2% of the world’s total energy consumption. 48v racks currently represent 10% of the racks in the hyperscale industry. By 2023 48v racks will represent 50% of the racks in the industry.

As of Dec. 2020, the AEIS power shelf is under customer review. The reason why AEIS’s power shelf will beat out the competition is because, 1) their power shelf is 30% smaller than competitors (smaller shelf, more real estate for computing power) and 2) their power shelf was also the first to demonstrate 98% power conversion- the highest in the industry. A single design win from a tier-I hyperscale data center producer would jump revenue in this vertical dramatically.

Medical and Industrial:
Medical and industrial represented 22.15% of the revenue in 2020. This segment grew 27% y/y (mainly driven by full year results of Artesyn acq.). At the end of 2020, the company acquired Versatile power, who’s acquisition brings along greater exposure to the medical market. There is no clear catalyst for a massive revenue jump in this vertical, however, 27% y/y growth is likely to continue as this revenue vertical has averaged a 39% growth rate over the last four years with revenue increasing y/y.

Telecommunication Networks:
This segment represented 11.8% of 2020 revenue. Y/y growth in this segment was 245% (mainly driven by full years results of the Artesyn acq.). There is no clear catalyst for a large revenue jump, however the exposure to the growing 5G industry is in line with the company’s product line and offers revenue diversification.

Valuation:
The company is currently trading at a 30 P/E (27 when we remove cash). The growth rate across revenue verticals is much higher than the P/E, indicating that at this price the company is cheap compared to future growth prospects. As the supply of semiconductors is greatly outstripped by the demand, the investments in order to produce more supply will feed through the system to benefit AEIS. The company also stands to gain major revenue jumps with design wins in the hyperscale data center segment. All things considered the stock is a clear buy.

Management (Scuttlebutt): CEO Yuval Wasserman (Just retired)

Wasserman has been CEO of AEIS for 7 years and with the company for 13 years. Wasserman has $19M in equity and has only sold $7M in equity during his time. Wasserman will retire this year and be succeeded by Steve Kelley.

CEO Steve Kelley (Successor)
Steve has over 30 years of management experience in the semiconductor industry (Texas Instruments & Phillips semiconductors). Bullish support for the semiconductor revenue vertical. Pay incentives are aligned. 3.5M of stock on a 3 yr schedule.

Stock Performance 1 yr.