Company Reports

With global stocks declining sharply due to the possibility of a US recession, the decline among semiconductor firms like wide-moat ASML and narrow-moat Besi has been particularly pronounced. We believe this a rare opportunity to buy shares of two exceptional firms, with competitive advantages and sound operations management. ASML and Besi offer a 28% and 20% upside to our EUR 900 and EUR 120 fair value estimates, respectively. In the case of a global recession, we expect both firms will remain profitable through the cycle given their assembly business model, which provides cost flexibility during periods of lower demand. Our 2025 EPS estimates for both companies are more conservative than PitchBook consensus estimates as of early July.

Narrow-moat t BE Semiconductor Industries shares declined more than 20% since the beginning of this week as a perfect storm scenario hit the shares. First, on July 24 peer ASMPT gave a disappointing outlook for the third quarter and said it expects a 6.4% sequential sales decline. ASMPT shares took a 23% hit, dragging Besi shares down by almost 8%. Moreover, Google’s parent Alphabet hinted there might be overinvestment in artificial intelligence, causing a major pullback in semiconductor stocks. Although we are reducing our 2024 revenue estimate for Besi by 15% due to weaker demand in mainstream applications like autos and industrial, we anticipate a stronger recovery over 2025-27 and maintain our EUR 120 fair value estimate. Our forecasts, although bullish, also remain more conservative than PitchBook consensus prior to this earnings release. Shares are now fairly valued and further declines may offer a good buying opportunity.

BE Semiconductor Industries understands well how to operate in a cyclical industry like semiconductors. Supply/demand balances can change rapidly in the chip industry, so equipment suppliers need flexibility to adapt. Besi runs a very flexible business model by (1) multisourcing from different suppliers to rapidly adapt capacity to demand changes, (2)

Narrow-moat BE Semiconductor Industries' first-quarter revenue was within expectations at EUR 146 million, an 8.3% sequential decline. Gross margins beat management estimates for the seventh consecutive quarter, at 67.2% compared with management’s guidance of 64%-66%. The outlook for the second quarter is what likely disappointed investors and sent shares down 3% in early April 25 trading. Orders came in at EUR 127 million (EUR 166 million last quarter) and management said it expects flat sequential revenue in the second quarter with an expected acceleration in second-half 2024, a statement we have heard from many semiconductor companies. Even if we see further delays into 2025, these will just be delays in growth, in our view, as long-term demand for Besi’s mainstream and hybrid bonding assembly systems is solid. We raise our fair value estimate to EUR 120 per share to adjust for the time value of money, with shares remaining 17% overvalued. If shares get closer to our fair value estimate, we believe Besi will be a good long-term investment with its industry-leading gross margins, high market share, and exceptional capital allocation skills. Our fair value estimate represents a forward price/earnings of 42 for 2024 and 29 times for 2025.

Narrow-moat BE Semiconductor Industries, or Besi, impressed with another very solid quarter, beating management’s guidance once again for both revenue and gross margins. Revenue grew by 29.4% sequentially, compared with expected growth of 15% to 25%, and gross margin came in at 65.1%, compared with guidance of 62% to 64%. Investors liked the results, and shares are up by 15% in Feb. 22 trading. We are raising our fair value estimate to EUR 110 per share from EUR 86 as we increase our forecast for hybrid bonding sales and raise long-term gross margins to 63%. Despite guidance of a 5% to 15% decline in sales for the next quarter, we expect 2024 will be strong as foundries and integrated device manufacturers increase their installed base of hybrid bonding systems. Besi expanded from three to nine hybrid bonding customers across all continents, reaching an installed base of 40 at year-end. We expect very strong sales in the next two years, reaching more than EUR 1 billion in 2025 compared with EUR 580 million in 2023. We also assume higher long-term unit pricing of hybrid bonding systems as Besi introduces new generations of machines with higher accuracy. Despite the raise in valuation, we still see the shares overvalued and recommend investors wait for more margin of safety. Our Capital Allocation Rating is Exemplary.

BE Semiconductor Industries understands well how to operate in a cyclical industry like semiconductors. Supply/demand balances can change rapidly in the chip industry, so equipment suppliers need flexibility to adapt. Besi runs a very flexible business model by (1) multisourcing from different suppliers to rapidly adapt capacity to demand changes, (2)

Shares of narrow-moat BE Semiconductor were up 13% after a very strong third-quarter report and healthy guidance for the fourth quarter. We remain impressed by Besi’s ability to deliver industry-leading gross margins (64%-65%) in a year of cyclical contraction for semiconductors; quarterly revenue was down 27% year over year to EUR 123 million. As an example, wide-moat equipment peers Applied Materials, KLA, and ASML have delivered 46%, 60%, and 51% gross margins during 2023. Besi can achieve high gross margins thanks to a laser-focused product portfolio, high-margin service revenue, a flexible operating cost model, and excellent management of the supply chain. EBIT margin came in at 35% compared with 31% and 39% in the previous two quarters. We are raising our fair value estimate to EUR 86 per share from EUR 82 after slightly raising our medium- and long-term revenue and gross margin assumptions. The shares of this high-quality name appear overvalued, though, trading near EUR 100, so we recommend that investors be patient until a good opportunity arises. Our Capital Allocation Rating for Besi is Exemplary.

BE Semiconductor Industries understands well how to operate in a cyclical industry like semiconductors. Supply/demand balances can change rapidly in the chip industry, so equipment suppliers need flexibility to adapt. Besi runs a very flexible business model by (1) multisourcing from different suppliers to rapidly adapt capacity to demand changes, (2)

Narrow-moat Besi closed the second quarter with EUR 162.5 million in sales, down 24% year over year but up 21.8% sequentially as demand for the smartphone market begins to recover, a narrative we also heard from Soitec on July 24. Despite the sales decline, Besi closed the quarter with a gross margin of 65.6%, its highest ever, which we consider impressive for a company in a cyclical downturn but which does not surprise us. Besi runs a very flexible business model, with supply chain multisourcing, a flexible workforce, and premium pricing, which lead to gross margins. If this cycle behaves like previous semiconductor cycles, management expects the third quarter to be weaker than the second quarter given a seasonal pattern, and a strong rebound in the fourth quarter where they expect revenue above the first quarter. We are maintaining our EUR 82 fair value estimate and Exemplary Capital Allocation Rating. Soon, we expect to adjust our short- and medium-term top-line and bottom-line expectations.

We are initiating on BE Semiconductor Industries, or Besi, with a narrow moat supported by intangible assets and switching costs, an Exemplary Morningstar Capital Allocation Rating, and EUR 82 fair value estimate, with shares overvalued by 20% as of the last trading session. Its Capital Allocation Rating comes from accretive organic investments and research and development, cost discipline, appropriate dividends and buybacks, and a clean balance sheet.

BE Semiconductor Industries, or Besi, understands well how to operate in a cyclical industry like semiconductors. Supply/demand balances can change rapidly in the chip industry, so equipment suppliers need flexibility to adapt. Besi runs a very flexible business model by 1) multisourcing from different suppliers to rapidly adapt capacity to demand changes, 2)