Alpha and Omega Semiconductor: Time To Get Back In (NASDAQ:AOSL)

Things have calmed down for Alpha and Omega Semiconductor Limited (NASDAQ:AOSL), a supplier of power semiconductors. After a wild start to the year that saw the stock make big moves up and down, the stock has basically gone sideways in the second half of 2022. Sideways action looks unappealing, especially to those who value more instant gratification, but there are still reasons why long AOSL is worth considering. Why will be covered next.

Now could be a good time for long AOSL with the stock at key support

AOSL stock managed to stay afloat in the first quarter of 2022, although with some big moves up and down, but that did not last. Overall, it has been a disappointing year for AOSL, with only a few weeks left in 2022. The stock peaked in March with a gain of 9% for the year, but it has now lost 50% YTD with a closing price of $30.45. The chart below shows how the stock has lost half its value in 2022.

However, the YTD losses are no greater than where they were in early July. In other words, the stock is roughly where it was in early July, which means the losses came in the first half of 2022. The stock has essentially gone sideways in the second half of 2022, resulting in no significant increase in YTD losses. The huge volatility seen earlier in the year has also come down. AOSL used to be on a rollercoaster ride earlier in the year, with the stock gaining and losing anywhere from 25-50% in just a few weeks, but this is no longer the case.

Furthermore, the stock appears to have double-bottomed in the $27.50-30.00 region. First in early July and then three months later in October. The stock has not been able to break through this region despite multiple attempts, suggesting the presence of support. This is no coincidence. If we take the March 2020 low of $5.88 and the March 2022 high of $65.16, then the closely watched 61.8% Fibonacci retracement level is at $28.52, which is roughly halfway through the $27.50-30.00 region. It’s also close to the low of the year at $29.25, intraday lows not included, set on October 12. The stock proceeded to bounce after October 12, similar to what it did after the July low.

However, it’s worth noting that the stock has been declining lately. The stock could soon be in danger of falling through support in the $27.50-30.00 region. The charts could be in the process of forming what looks like a descending triangle with the lows staying flat and the highs going lower. The former is the lower trendline and the latter is the upper trendline.

The upper and the lower trendline are thus converging on each other, which means the stock will have to either break through the lower trendline or, alternatively, break through the upper trendline. If the former, it’s a continuation pattern and if the latter, it’s a reversal pattern. The former is often thought to be the more likely outcome, but the latter outcome is also possible.

At the same time, the trendlines are not close to converging, which suggests the stock could continue to go sideways for some time. If the stock does break higher, it could possibly rally all the way to $45 or so. This is where support was earlier in the year and where the stock topped out in August, indicating that what used to be support has become resistance. A rally to $45 would result in a gain of around 50% from current levels.

AOSL is affordable

The stock is close to an important support level, but there is another reason why AOSL is worth looking into and that’s multiples. For instance, AOSL has an enterprise value of $661M, which is roughly equal to 4.6 times EBITDA on a forward basis and 4.7 times EBITDA on a trailing basis. In comparison, the median for the sector is 12.9x and 13.5x respectively.

Note that AOSL trades at 14.8 times GAAP earnings with a trailing P/E of 2. While a very low P/E ratio of 2 might raise some eyebrows, it’s worth mentioning that this is primarily due to the GAAP EPS of $13.54 in Q2 FY2022, which led to GAAP EPS of $15.90 in the last 12 months and a very low P/E multiple. The outsized GAAP EPS was in turn due to a one-time gain of $391M as a result of changes to the equity interest in the Joint Venture Company or JVC in China.

The stock is also valued at just below book value with a price-to-book of 0.99. This is partially due to AOSL having $316M in cash and cash equivalents on its balance sheet with a market cap of $874M, but also due to AOSL having an equity method investment among its assets as a result of AOSL’s minority stake in the JVC, which is valued at $376M. These two together exceed AOSL’s enterprise value of $661M. The table below shows some of the multiples AOSL trades at.

	AOSL
Market cap	$874.31B
Enterprise value	$661.45B
Revenue (“ttm”)	$799.0M
EBITDA	$140.7M
Trailing GAAP P/E	2.01
Forward GAAP P/E	14.84
PEG ratio	0.00
P/S	1.08
P/B	0.99
EV/sales	0.83
Trailing EV/EBITDA	4.70
Forward EV/EBITDA	4.60

Click to enlarge

Source: SeekingAlpha

The shorts may be giving up, although risks remain out there

The stock is affordable and it seems to have found support. There have been no real lows for some time, which seems to have frustrated the shorts with a number of them giving up. Short interest rose in the first three quarters of 2022, going from 0.75M shares at the start of the year to a peak of 2.56M shares at the end of September, but it has since declined by about a fifth to 2.04M shares at the end of November, according to the latest data. This translates to a short float of about 10.2%. The shorts packing it up is a positive sign for the bulls.

Still, AOSL is not without issues. For starters, the market for semiconductors has weakened as 2022 has progressed and AOSL is now starting to feel the impact after staying fairly resilient for much of the year. AOSL actually missed consensus estimates for the top and the bottom line in its most recent earnings report and guidance also fell short of expectations.

Revenue still increased by 11.5% YoY to $208.5M, which is a record high. GAAP EPS increased by 3.5% YoY to $0.88 and non-GAAP EPS increased by 13.2% YoY to $1.20. Note that EPS gains were held back by share dilution. The weighted average of shares outstanding, GAAP or non-GAAP, rose to 29.42M in Q1 FY2023, up from 28.47M in Q4 FY2022 and 27.64M in Q1 FY2022. Note also that the big sequential gains are due the easing of COVID-19 restrictions in China, which affected Q4 FY2022. The table below shows the numbers for Q1 FY2023.

(GAAP)	Q1 FY2023	Q4 FY2022	Q1 FY2022	QoQ	YoY
Revenue	$208.476M	$193.959M	$187.035M	7.48%	11.46%
Gross margin	34.1%	32.6%	34.5%	150bps	(40bps)
Operating income	$25.534M	$18.140M	$24.949M	40.76%	2.34%
Net income (attributable to AOSL)	$26.038M	$15.091M	$23.424M	72.54%	11.16%
EPS	$0.88	$0.53	$0.85	66.04%	3.53%
(Non-GAAP)
Revenue	$208.476M	$193.959M	$187.035M	7.48%	11.46%
Gross margin	35.4%	33.8%	35.3%	160bps	10bps
Operating income	$37.084M	$28.905M	$30.827M	28.30%	20.30%
Net income (attributable to AOSL)	$35.205M	$27.115M	$29.303M	29.84%	20.14%
EPS	$1.20	$0.95	$1.06	26.32%	13.21%

Click to enlarge

Source: AOSL Form 8-K.

However, the outlook sees the numbers getting worse. Guidance calls for Q2 FY2023 revenue of $192-198M, an increase of 0.9% YoY, but also a decline of 6.4% QoQ at the midpoint. It’s true Q2 tends to be worse off due to seasonality, but the decline was bigger than expected. The forecast sees gross margin declining by a hefty 540 basis points, primarily due to a higher share of lower margin products, resulting in a worse product mix and likely negative earnings growth.

(GAAP)	Q2 FY2023 (guidance)	Q2 FY2022	YoY (midpoint)
Revenue	$192-198M	$193.3M	0.88%
Gross margin	29.0-31.0%	35.4%	(540bps)

Click to enlarge

Management added some color as to what is behind the soft guidance. AOSL expects the next few quarters to suffer from an inventory correction, particularly in the smartphone and PC markets, something other companies are also experiencing. From the Q1 earnings call:

“Looking forward, we expect to be impacted by industry inventory correction, particularly in PCs and smartphones. As a result, we anticipate our calendar Q4 2022 results to be somewhat weaker than the historical seasonality that we typically experienced during this period. Our data suggests that this process will occur over the next couple quarters before orders begin to normalize and be more in balance with the end consumer demand.”

A transcript of the Q1 FY2023 earnings call can be found here.

Consensus estimates have been lowered as a result. Estimates now project GAAP EPS of $0.47 and non-GAAP EPS of $0.81 in Q2 FY2023, a decline of $0.39 or 32.5% QoQ and YoY. FY2023 non-GAAP EPS is projected to be $3.26-3.81, a decline of $0.75-1.30 or 16.4-28.5% YoY.

Investor takeaways

It’s not hard to see why some may opt to stay away from AOSL. The company is forecasting a downturn due to an inventory correction. Sales and profits are expected to shrink in the coming quarters. The stock is in danger of falling to new lows. The stock’s value has been cut in half with 2022 coming to a close. Long AOSL has been mostly a losing proposition this year.

However, there are arguments to be made in favor of long AOSL nonetheless. Alpha and Omega Semiconductor Limited stock is essentially valued at book value. Furthermore, while nothing is imminent, AOSL’s JVC stake could be worth a lot more than its current book value in an IPO. There is a downturn, but the company should get over it, given enough time. Alpha and Omega Semiconductor Limited should remain profitable and the balance sheet is in good shape. The stock is close to support, which makes for a good entry point. It’s true support can fail, but the fact that a key support level has held for six months is an encouraging sign the bottom is in.

I am, therefore, bullish AOSL after having moved to the sidelines earlier in the year, even though it may take a while before a payoff. Bulls may want to dollar average since the stock could go lower in the short term. If instant gratification is a must, then AOSL is probably not it. Alpha and Omega Semiconductor Limited is a longer-term play and patience is required, especially with AOSL and the industry entering a downturn. If the latter is not an issue, then long AOSL is worth considering, provided, of course, one has the time and means to see it come to fruition.