EUR 850.00 For Business Accounts Only

Morningstar | AMS Remains on Track for Growth; Increasing FVE to CHF 96. See Updated Analyst Note from 24 Jul 2018

Austrian sensor firm AMS AG reported second-quarter results that modestly outperformed our expectations for revenue, and losses that were less significant than management's guidance indicated. Management also provided an updated outlook for the year while maintaining and giving further details on the midterm profitability and revenue targets. We are raising our fair value estimate to CHF 96 from CHF 93 to incorporate the guidance. We are maintaining our no-moat rating for the firm which, despite recent design wins and partnership announcements, remains extremely dependent on Apple and iPhone customers. Shares currently trade within four-star territory.

Revenue for the quarter was EUR 215 million, a 42% sequential decline and 18.5% increase year over year as the consumer communications business declined significantly from recent highs. Gross margin for the quarter also declined sequentially to 9.5% from 33% due to the expected underutilization of the Singapore plant. The high cost of sales, along with the firm maintaining operating expenditure levels, resulted in a loss per share of EUR 0.34.

AMS announced earlier in the month that Chinese smartphone maker Xiaomi would use an AMS VCSEL product in its upcoming smartphone, Mi 8. This news came in addition to the still-unnamed Chinese smartphone OEM that is using an AMS illumination product. While the latter was included in our valuation, we were pleased to get more details on the product timeline (which is expected to go into production in latter half of 2018) and the outlook for future partnerships with producers in the Android market.

Third-quarter revenue is expected to increase year over year by 53% at the midpoint of guidance, implying revenue of roughly EUR 400 million. Management further expects the underutilization to be mitigated as volume product begins ramping for strong sales throughout the end of 2018 and on into 2019. We currently anticipate low-teens adjusted operating margin for the quarter.

The firm announced several partnerships and investments that are intended to bolster its supply chain and 3D sensing capabilities. With Bellus3D and Omnivision Technologies as partners, AMS has, or currently has in development, solutions in each of the major 3D sensing technologies: structured light, time-of-flight, and stereo vision. At the moment, the use-cases for structured light appear to be potentially limited to very high-end consumer products, such as the iPhone X. We are positive on the firm expanding their capabilities to address several price points in the 3D sensing market, but we also believe this indicates the nascence of the technology.

AMS' long-term CAGR outlook for the business remains unchanged at 60% between 2016 and 2019, with the expectation of reaching roughly EUR 2.2 billion at the end of next year. We remain positive on this revenue target and the firm’s similarly ambitious profitability goal of 30% adjusted operating margin by 2020. That said, management has indicated that there may be the need for strategic realignments as they determine how to address the most attractive growth markets. While this is not cause for significant concern, we believe it does indicate the extent to which the various use cases for 3D sensing are quickly evolving. We reiterate the firm's sensitivity to Apple, the incipient nature of 3D sensing technology, and the current lack of moat for AMS’ business. However, we like the firm at current valuations and believe this may be a good opportunity for risk-tolerant investors to invest in this volatile company.