BE Semiconductor Industries (BESI) shares are up nearly nearly 25% so far this year as the company builds its leadership in semiconductor packaging, which is in high demand in the AI era. The company releases second quarter results on July 25.
Key Morningstar Metrics for BESI Stock
• Fair Value Estimate: €120
• Morningstar Rating: 2 stars
• Morningstar Economic Moat Rating: Narrow
• Morningstar Uncertainty Rating: High
Why is BESI Stock Rallying?
Morningstar’s equity analyst Javier Correonero attributes the shares' recent rally to the following factors:
• Semiconductor packaging is in high demand for AI applications
• The company's flexible operating model - this allows it to scale up/down capacity
• Product commonality reducing design complexity
• High product focus
The company also has higher gross margins than ASML (ASML), Applied Materials (AMAT) and ASM International (ASM).
AI and Moore's Law in Action
Named after Intel co-founder Gordon Moore, Moore’s Law states that the number of transistors a microchip can contain doubles every two years with minimal rise in cost.
According to Correonero, Moore’s Law has been decelerating, but the industry has found workarounds to continue its progress. One such way is the use of advanced packaging, where BESI has expertise.
The Benefits of Advanced Semiconductor Packaging
• Speeds up data transfer between chips
• Improves chip performance
• Lowers costs
Advanced packaging allows for shorter, finer interconnections between chips, improving data transfer, improving performance and lowering costs.
While chip packaging has traditionally been seen as a commodity business, it is now gaining importance. Advanced packaging is being used for leading-edge chips in smartphones or AI.
Is the Stock Rally Justified?
At €166 per share, BESI trades above its fair value estimate.
Correonero says: "The shares are overvalued right now compared to our €120 fair value estimate. But I do believe BESI is a high-quality company, and the market is placing a premium on it due to this quality. Any pullback on macro concerns is a good time to buy the shares as the long-term picture is strong."
More From the Analyst Note on BESI
Economic Moat Rating
BESI is the market-leading supplier of hybrid bonding machines, the most advanced semiconductor packaging machines, and is the main supplier to TSMC, the world’s largest semiconductor/chip foundry. Moore’s Law claims the number of transistors on the same area of silicon will roughly double every two years.
Hybrid bonding will be the main assembly technique for high-end chips in the next decade, with foundries like TSMC or Samsung still needing to build their installed base. We believe the trend toward more complex packaging machines will be healthy for BESI’s returns going forward.
We assign Besi a narrow moat rating supported by intangible assets and switching costs. Although the assembly and packaging of semiconductors (back-end where BESI operates) is normally seen as a less critical process than the manufacturing or front-end (this represents 85% of the chip costs while the back-end represents 15%), we believe BESI has carved out a solid competitive position in this niche thanks to its accumulated know-how and expertise
Read more about BESI’s moat rating.
Financial Strength
As of December 2023, BESI had close to €300 million long-term debt, most of it convertible debt issued since 2016. We expect most of this debt will be converted into equity given that BESI's share price has been consistently above the exercise price of these bonds for a long time. Besi has offset the dilution from these issuances with consistent, price-agnostic share repurchase programs. BESI has €400 million in cash as of December 2023, having kept a significant cash position every year since 2015. We support this cash management strategy as cyclical companies should maintain some cash buffer for industry downturns.
Read more about BESI’ financial strength.
Risk and Uncertainty
We give BESI a High Morningstar Uncertainty Rating. Although BESI has proper risk mitigation strategies in place (strong supply chain management with a multisourcing strategy and flexible workforce to adapt to the semiconductor cycle) it is still exposed to the cyclical semiconductor industry.
BESI’s revenue cumulatively declined by 40% from 2017 to 2019, only to rebound by 110% from 2019 to 2021. Equipment manufacturers have to be ready and able to increase or decrease their output as chip manufacturers increase or decrease their production, something BESI does well. Service revenue, which represents 15% to 20% of total revenue and is one of BESI’s profit engines, is more resilient through the cycle
Read more about BESI’s risk and uncertainty.
BESI Bulls Say
• It is almost certain that hybrid bonding machines will be needed over the next decade. Their average selling price is several times that of previous generations, and they will also generate higher service revenue due to higher complexity.
• BESI has exceptional capital allocation. It has invested in the right product areas, with appropriate shareholder distributions, and a clean balance sheet. BESI knows how to operate in a cyclical industry, with a strong supply chain and flexible operations.
• BESI could be an acquisition target for a larger front-end manufacturer.
BESI Bears Say
• BESI operates in a highly cyclical industry, which can cause big swings in revenue, profit, and the share price.
• BESI has high concentration of revenue. The loss of one customer could have a long-term adverse impact on the company’s financials.
• Less advanced back-end equipment can be more easily replaced or serviced by third parties.
