ACM Research Is Still Facing Unresolved Issues (NASDAQ:ACMR)

ACM Research (NASDAQ:ACMR) made huge strides in its latest earnings report, far surpassing expectations. While some might have been taken by surprise, most shouldn’t be. For starters, the base was lowered with ACMR suffering big declines in Q1. In addition, the Q1 results were primarily the result of COVID-19 lockdowns in China. So it stood to reason that ACMR would recover along with the lifting of restrictions in China. Nevertheless, the Q2 numbers were much better than expected. However, ACMR still faces a number of unresolved issues. Why will be covered next.

ACMR comes roaring back

If there’s one thing ACMR can agree with, it’s that COVID-19 can have a huge impact on quarterly results, especially if it involves resorting to lockdowns to combat the spread of COVID-19. Unfortunately for ACMR, China has decided to stick with lockdowns when it comes to dealing with COVID-19 outbreaks. These lockdowns resulted in ACMR falling into the red in Q1. Revenue fell by as much as 55.7% QoQ.

However, the subsequent lifting of restrictions put ACMR in a position to make up for lost sales, if only in part. In fact, the top and the bottom line far surpassed consensus estimates in Q2. Q2 revenue increased by 147% QoQ and 94% YoY to $104.4M. GAAP EPS increased by 80% YoY to $0.18 and non-GAAP EPS increased by 266.7% YoY to $0.22. In comparison, consensus estimates expected revenue of $72.3M and non-GAAP EPS of just $0.03.

Note that the 362.6% YoY increase in GAAP operating income is much more than the 86.3% YoY increase in net income. This is because of an unrealized gain of $3.78M due to the trading of securities in Q2 FY2021, which boosted GAAP earnings in that quarter. In contrast, there was a $0.42M unrealized loss due to the trading of securities in Q2 FY2022, skewing the quarterly comparisons. The table below shows the numbers for Q2 FY2022.

(GAAP)	Q2 FY2022	Q1 FY2022	Q2 FY2021	QoQ	YoY
Revenue	$104.395M	$42.186M	$53.864M	147.46%	93.81%
Gross margin	42.3%	46.7%	40.2%	(440bps)	210bps
Income (loss) from operations	$20.035M	($9.306M)	$4.331M	–	362.60%
Net income (loss)	$12.236M	($5.786M)	$6.567M	–	86.33%
EPS	$0.18	($0.09)	$0.10	–	80.00%.
(Non-GAAP)
Revenue	$104.395M	$42.186M	$53.864M	147.46%	93.81%
Gross margin	42.4%	46.9%	40.5%	(450bps)	190bps
Income (loss) from operations	$22.004M	($7.932M)	$5.666M	–	288.35%
Net income (loss)	$14.628M	($0.554M)	$4.119M	–	255.13%
EPS	$0.22	($0.01)	$0.06	–	266.67%

Click to enlarge

Source: ACMR Form 8-K

ACMR shipped 13 tools in Q2 that were originally supposed to be shipped in Q1. The rebound in Q2 offset the losses suffered in Q1, putting ACMR on track to hit the goals set at the start of FY2022. Guidance still calls for FY2022 revenue of $365-405M, an increase of 48% YoY at the midpoint. From the Q2 earnings call:

“I will now provide our outlook. We have a strong order through year end. Due to a tight supply chain environment, we are keeping our outlook unchanged in the range of $365 million to $405 million. The range of our outlook consider among other factors, continued expansion of production and shipping operation in Shanghai.”

A transcript of the Q2 FY2022 earnings call can be found here.

Valuations are down

ACMR looks to be back on track. In addition, ACMR used to trade at extremely high multiples as mentioned in an older article, but they have come down quite a bit. Multiples used to reach into the triple digits in the past. Granted, they are not as low as they used to be a few months ago after the recent rally in the stock, but they are much lower on average. For instance, the stock is valued at 1.76 times book value. In comparison, the 5-year average is 7.16x. The table below shows the multiples for ACMR.

	ACMR
Market cap	$1.16B
Enterprise value	$900.98M
Revenue (“ttm”)	$308.7M
EBITDA	$45.5M
Trailing P/E	40.54
Forward P/E	28.31
PEG ratio	8.65
Price/sales	3.71
Price/book	1.76
EV/sales	2.92
Trailing EV/EBITDA	19.79
Forward EV/EBITDA	15.94

Click to enlarge

Source: SeekingAlpha

Why ACMR is still not in the clear

Earnings have recovered and valuations are more reasonable than before. Some might see this as justification for going long ACMR. However, ACMR still faces a number of pitfalls. For instance, the numbers in Q2 were much better than in Q1 due to the absence of severe COVID-19 lockdowns in China, but there’s always the possibility of another bout of tough restrictions popping up. As long as China stays committed to using lockdowns to fight COVID-19, earnings are at risk of being hammered.

There are other potential problems out there that have yet to be resolved. For instance, ACMR has been listed as one of the companies that could be delisted by the U.S. government for not abiding by U.S. accounting regulations.

“I’m pleased with the progress with our new auditor. On May 19, we appointed PCAOB compliant auditor, Armanino as our independent public accounting firm for our first year 2022 audit.

On June 30, this was ratified by our shareholders. Following our 2022 annual auditing and filing of the 10-K, we expect to be removed from this published by the SEC pursuing to the U.S. holding foreign company accountable factor.”

ACMR has responded by appointing a new auditor, which it believes will result in getting removed from the list of companies that could be delisted. On the other hand, it’s worth pointing out that China and the U.S. have yet to come to an agreement on the issue. A number of Chinese companies have recently decided to leave the NYSE due to this issue. The threat of delisting remains out there for ACMR.

It’s also worth mentioning that short interest spiked in the aftermath of ACMR being added to the list of companies facing delisting. Short interest rose in early March after the SEC mentioned ACMR and it now stands at 6.7M or 15.2% of the share float, roughly 6 times more than where it was before ACMR was added to the list of companies to be delisted.

The stock has hit resistance

The delisting news had another consequence. The stock fell off a cliff in early March, resulting in ACMR losing half of its value in a couple of days. On the other hand, while ACMR is still down 31% YTD, the stock has recouped some of its losses in recent months. The chart below shows how the stock has recovered to a certain degree.

However, the rally has come to a standstill in recent days. The stock seems to have hit resistance. Note how the stock has problems breaking through the upper trendline in the chart above. The resistance imposed by this trendline has been in place for all of 2022. It’s not impossible for the stock to move higher, but if the trend holds, the stock is likely to move lower.

Note that the stock is back to where it used to be in the summer of 2020. In other words, anyone who invested in ACMR back in the summer of 2020 has nothing to show for the last two years. It’s true the stock rallied at certain points, but, whatever gains were made, were lost as quickly as they were won.

Investor takeaways

ACMR has recovered lost ground with its latest quarterly results. ACMR suffered a significant setback in Q1 with sales falling to just $42M, putting it in danger of missing out on its FY2022 target of $365-405M in annual revenue. However, ACMR managed to surpass expectations with a quick rebound. Sales grew 147% sequentially to $104.4M. ACMR got derailed in Q1 by COVID-19 lockdowns, but it’s now back on track when it comes to hitting its targets set at the start of FY2022.

However, the possibility of additional lockdowns in China hangs over ACMR and with it the possibility of a repeat of what happened before in Q1. The Chinese government is sticking with lockdowns to combat COVID-19, which means that ACMR is vulnerable to future derailments if or when the next COVID-19 flare-up gets here.

China’s decision to stick with lockdowns would be less of an issue if ACMR was not so heavily reliant on the Chinese market. Of the $104M in Q2 sales, China accounted for roughly $100M or 96%. ACMR is working on reducing its exposure to China, but there’s still a long way to go in reducing ACMR’s reliance on a single market.

ACMR has managed to recoup a portion of the losses its stock suffered earlier in the year, but further gains will be harder to come by with resistance in the way. It’s possible the stock could succeed in breaking through, but the odds are against it. ACMR is up against a resistance level that has kept a lid on the stock for all of 2022. Trends can change, but the current one suggests the stock is more likely to be heading lower than it is to be heading higher.

I am neutral on ACMR as stated before in a previous article. ACMR has a number of things going for it. Multiples are lower than they have been on average in recent years. ACMR is releasing new products that appear to have gotten a good reception. ACMR is still growing at a fast clip with FY2022 sales likely to increase by almost 50% YoY.

On the other hand, ACMR is still weighed down by a number of unresolved issues. ACMR’s reliance on China comes with a number of downsides. Of all the potential problems, the most pressing one seems to be the possibility of being delisted by the U.S. government. The changes in short interest this year suggest this issue is first and foremost on people’s minds.

ACMR has done its part, but it still needs some sort of understanding between the governments of China and the U.S. But not only is there no deal, there are calls in the U.S. Congress to impose sanctions on some of ACMR’s most important customers in China. As is the case with future lockdowns due to COVID-19, this too remains unresolved.

Bottom line, ACMR has made progress in recent months and the stock has responded accordingly, but much more needs to be done. ACMR has yet to find a lasting solution to several pressing problems, mainly as it relates to issues involving the U.S. and China. As long as these problems are out there, the stock is likely to keep doing what it’s been doing for the better part of the last two years, which is basically going in circles.

The stock may rally from time to time, only for the stock to give it all back depending on whether the headlines on U.S.-China relations turn better or worse. The stock goes up and down, only to wind up back to where it began. This going around in circles is likely to discourage many who would otherwise have been willing to give a long position in ACMR a shot. ACMR has gotten some things done, but more needs to be done.