ASE Technology Stock: Strengths Outnumber Weaknesses (NYSE:ASX)

ASE Technology Holding (NYSE:ASX) is doing quite well in a number of areas. Sales and profits, for instance, are going up at a double-digit pace. Yet the reality is that the stock has suffered substantial losses this year. Worse, there’s reason to believe more losses are on the way. However, longs may still want to stick with ASX. Why will be covered next.

The Trend Is Down For ASX

The semiconductor sector has struggled in 2022 and ASX has not escaped the fallout as the leading global provider of outsourced semiconductor assembly and test or OSAT services. The stock has lost 23% YTD. At the same time, it’s worth noting that ASX has done better than most semis. For instance, the iShares PHLX Semiconductor ETF (SOXX) has lost 33% YTD.

However, there’s reason to believe additional losses are likely on the way. ASX has in all likelihood yet to hit bottom. Note how, in the chart above, the stock has trended lower all year. The lows can be connected to form a descending trendline. Similarly, the highs can also be connected to form a descending trendline. The stock has moved lower between these two extremes, with the former being support and the latter being resistance.

If the trend holds as it has all year, the stock is most likely heading lower. The pattern all year is for the stock to keep dropping until it comes into contact with support at the lower trendline. This has yet to happen. In other words, the stock has some ways to go before it encounters support, which favors a further decline in the stock for a while longer.

On the other hand, it’s worth noting that the trendlines are diverging. The lower trendline is declining at a steeper angle than the upper trendline. The charts could be forming a descending broadening wedge, which is more often than not a bullish reversal pattern. Stocks tend to move lower within the wedge, but once they break out of it, it’s usually to the upside because support held its ground and resistance did not. In a nutshell, the stock is likely heading lower in the short term, but a move higher may be on the horizon.

ASX Is Weighed Down By Short-Term Headwinds

The charts favor a move down in the stock in the immediate future, but there is another factor in favor of lower stock prices. Growth has been strong lately, but ASX is in somewhat of a soft patch due to several factors. For starters, quarterly growth in the first half of the year tends to be weaker due to seasonality. But more significantly, ASX is getting hit by supply chain disruptions and rising costs as a result.

ASX is based in Taiwan, and it has a large presence in mainland China. Both regions have been negatively affected by disruptions caused by COVID-19 outbreaks, requiring countermeasures from ASX. Costs are likely to go up as a result, which will have a negative impact on quarterly growth in the next one or two quarters. From the Q1 earnings call:

“Taiwan-centric issues, such as the recent COVID surge, are also creating factory level operational complexities. Our Taiwan factories are taking appropriate measures to prevent the spread of the disease within our factories. Taiwan’s pragmatic approach should create manageable disruptions in Taiwan due to COVID mitigation. However, such policies may make running our various Taiwan factories less efficient.

Due to these factors, we do see a near-term increase in running costs related to the suboptimal macro environment. At this time, we expect the higher-cost environment to last between 1 to 2 quarters.”

A transcript of the Q1 FY2022 earnings call can be found here.

In addition, there are increasing signs of slowing demand for certain types of semiconductors. Companies like Intel (INTC) and Samsung (OTC:SSNLF), for example, have reported weakening demand for consumer goods like smartphones and PCs, which has soured investor sentiment towards semis and presumably ASX as well.

“So cell phone or some of the consumer products seems to be relatively weaker than the other sectors. I think the — from our standpoint, I think the overall situation still remains very healthy. I think the — in terms of high-performance computing, in terms of networking and automotive, we still see very, very strong momentum.”

Management acknowledges there is weakness in certain market segments, but it also states that in the case of ASX, they are being offset by strengths elsewhere.

Why Would Someone Want To Stick With ASX

Near-term headwinds are present. On the other hand, ASX believes it can handle them. ASX remains optimistic about its prospects for FY2022. Revenue and gross margin are both expected to grow sequentially throughout the year.

“to summarize, we came up with a very strong first quarter, things looking — continue to look very healthy for us throughout the year. We’ll continue to have sequential growth in both revenue and margin. We are facing some challenges in the short term, but we’re managing well at this point.”

A look at the most recent quarterly report shows why this confidence is not misplaced. Q1 revenue increased by 20.9% YoY to NTD144,391M, which is roughly equal to $5.2B using an exchange rate of 1:27.85. Revenue did decline sequentially, but that was expected due to seasonality. Earnings per share increased by 52% YoY to NTD2.92, which translates to $0.21 per ADS. EBITDA was NTD30,661M in Q1 FY2022, up from NTD24,867M in Q1 FY2021.

Keep in mind that ASX recently disposed of some of its manufacturing facilities in China. These facilities contributed about NTD6.8B to Q4 FY2021 revenue and NTD5.6B in Q1 FY2021, which means the YoY gains in Q1 FY2022 were better than reported. On a pro forma basis, Q1 FY2022 revenue declined by 13% QoQ, and it increased by 27% YoY.

Similarly, EPS increased by 62% YoY instead of 52% if contributions from the disposed facilities are factored out. The China sale led to NTD17.7B in non-operating income in Q4 FY2021, resulting in an outsized EPS of NTD6.99 in that quarter. If excluded, EPS declined by 9% QoQ instead of the reported 58%.

Gross margin was 19.7%, up 140 basis points YoY. Furthermore, gross margin could have been 100 basis points higher if not for the negative impact on margins due to the appreciation of the NTD versus the USD. Total interest-bearing debt was NTD225.1B, partially offset by NTD89.1B in cash and equivalent. ASX carries a significant amount of debt on its balance sheet, but the current ratio is nevertheless a manageable 1.22. The table below shows the numbers for Q1 FY2022.

(Unit: NTD M, except EPS)
	Q1 FY2022	Q4 FY2021	Q1 FY2021	QoQ	YoY
Revenue	144,391	172,936	119,470	(16.51%)	20.86%
Gross margin	19.7%	19.0%	18.3%	70bps	140bps
Operating margin	11.2%	11.3%	9.1%	(10bps)	210bps
Operating income	16,113	19,615	10,908	(17.85%)	47.72%
Net income attributable to shareholders	12,907	30,916	8,477	(58.25%)	52.26%
EPS	2.92	6.99	1.92	(58.23%)	52.08%

Source: ASX

ASX Has Its Attractions

ASX is growing sales and profits at a double-digit rate in spite of headwinds, but that is not the only reason why ASX is worth considering. ASX also comes at a relatively low asking price. For instance, ASX has an enterprise value of $18.3B, which is higher than its market cap of $13.6B due to the previously mentioned debt on the balance sheet.

Yet, enterprise value is equal to 4.26 times EBITDA on a forward basis and 4.39 times EBITDA on a trailing basis. The stock is valued at 1.57 times book value. Note that the forward P/E multiple is higher than the trailing one due to the China sale and not because earnings are expected to decline. The table below shows the multiples ASX trades at.

	ASX
Market cap	$13.62B
Enterprise value	$18.33B
Revenue (“ttm”)	$20,768.7M
EBITDA	$4,179.7M
Trailing P/E	5.91
Forward P/E	7.26
PEG ratio	0.05
Price/sales	0.66
Price/book	1.57
EV/sales	0.88
Trailing EV/EBITDA	4.39
Forward EV/EBITDA	4.26

Source: SeekingAlpha

ASX has one more ace up its sleeve that may be enough to convince the skeptics. ASX pays an annual dividend of $0.48, which means ASX has a dividend yield of almost 8%. There’s also room for the dividend to increase, with current estimates forecasting $0.87 in EPS in FY2022. If the stock price goes lower, the yield will only go higher.

On the other hand, it’s worth mentioning that the dividend was not always like this. The dividend has been going up in recent years, but ASX used to pay much less in dividends. It’s $0.48 right now, but it was $0.32 before that. Time will tell if it will be more or less in the future.

Investor Takeaways

ASX is in a slump. ASX has actually outperformed, but there’s no denying that the stock is trending lower. Chart patterns also suggest it’s most likely to stay that way for a while longer. Earnings growth has been strong, but ASX is going through somewhat of a soft patch, mostly due to supply chain disruptions in places like Taiwan and China.

However, near-term headwinds notwithstanding, the outlook still sees sequential growth in revenue and gross margins throughout FY2022. There is some weakness in certain market segments, but they are more than offset by strengths elsewhere. Headwinds are here, but they have not been able to have too much of a negative impact thus far. ASX has done a good job keeping them contained.

I am bullish ASX as mentioned in a previous article. Longs should brace themselves for more pain with the stock likely heading lower, but there is reason to believe better days are on the horizon. ASX is down at the moment, but it’s likely to rebound, especially with ASX growing at a solid pace and trading at a low multiple. The decline in the stock will not continue indefinitely, especially with multiples where they are.

Valuations are attractive at current levels, and they will become even more so if the stock goes down further. While the dividend payout has yet to establish itself, there’s no denying that ASX comes with some of the highest yields around, especially among tech stocks. In addition, there’s reason to believe quarterly earnings in the second half could be much stronger than the first half, with seasonality turning in favor of ASX and with the receding impact of COVID-19 lockdowns in China.

Bottom line, there is much more to like in ASX than not to. A stock in decline is admittedly not encouraging to see, but the current bout of weakness in the stock gives everyone a chance to get in on a growing company with good prospects and at a good price. If the adage is to buy low and sell high, then ASX is an opportunity to do just that.