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Magnachip Semiconductor Corporation (NYSE:MX) is a developer of semiconductor products primarily for electronics and power companies. I expect its OLED display and premium power microprocessors will drive its revenue growth at a CAGR of mid to high single-digits in the next five years. The company’s innovative product development capability is its main competitive advantage, which will help it capture competitors’ market share slowly and steadily in the coming years. Long-term growth-oriented investors can buy the company’s shares gradually utilizing proper pullbacks.
Magnachip is a designer and manufacturer of analog and mixed-signal semiconductor solutions. It develops its solutions for communications, Internet of Things (“IoT”), computing, industrial, consumer and automotive applications. The company develops its products by collaborating with leading innovators in the consumer electronics market, which helps the company strengthen its technology and develop highly innovative products.
Growth Drivers
Display Solutions
Magnachip’s display solutions product line is its primary growth driver. The product line offers customers flat panel display solutions including source and gate drivers and timing controllers. The solutions cover a wide array of flat panel displays used in mobile communication devices, automobiles, notebook PCs, desktop PC monitors, liquid crystal displays (LCDs) for various entertainment devices, and organic light emitting diode (OLED) and micro light emitting diode (Micro LED) televisions. According to a report:
The global display semiconductor components market size is experiencing significant growth and is expected to grow considerably in the next few years. A display semiconductor component refers to a basic physical part or entity in an electronic system, which is generally used in industrial & consumer electronics. Increasing demand for goods and rapid growing technology in these industries, reliability, precision, safety, & efficiency are crucial driving factors.
Magnachip’s display solutions in the form of analog and mixed-signal semiconductor components perform well in competitive environment since they support new generations of electronic devices. These devices include various display drivers that help display of high resolution images, and encoding and decoding devices that help playback of high definition video. The display solutions enable the electronic devices display high resolution images and high definition video without intermittent problems for a long period of time. As a result, they enjoy strong market demand by electronic device manufacturers. I expect the company’s display solutions will drive its long-term revenue growth in a sustainable manner.
Power Solutions
Magnachip’s power solutions product line is its another growth driver. The product line includes AC-DC/DC-DC converters, LED drivers, metal oxide semiconductor field effect transistors (MOSFETs), insulated-gate bipolar transistors (IGBTs), and various regulators and power management integrated circuits (PMICs). These products are used in a wide range of devices, such as televisions, smartphones, wearable devices, automobiles, LED lighting, and desktop, notebook and tablet PCs. Since the power solutions products are capable of increasing power efficiency, thereby improving heat dissipation and extending battery life, they are well-performer in the competitive environment. The market for LED lighting has high growth prospects, and therefore the company’s LED drivers will see rising demand in the years to come. According to a report:
The LED lighting market was valued at USD 75.81 billion in 2020, and it is expected to reach USD 160.03 billion by 2026, at a CAGR of 14.25% over the forecast period 2021 – 2026.
Overall, the company’s power solutions semiconductor products will experience increasing demand in the next three to five years due to rising demand for electronic and electrical products, such as consumer electronic products, electric vehicles and industrial motor drives, which I expect will boost the company’s long-term revenue growth.
Competition
Magnachip operates in a highly competitive industry with several competitor companies. These companies include ON Semiconductor (ON), STMicroelectronics (STM), Infineon Technologies (OTCQX:IFNNY), NXP Semiconductors (NXPI), and Diodes Incorporated (DIOD). Magnachip competes with these companies on the basis of design experience, manufacturing capabilities, quality of technical support, and price.
The company’s primary competitive advantage is that it has a wide variety of analog and mixed-signal semiconductor products, which helps it address multiple high-growth end markets. These semiconductor products also help the company rapidly develop and introduce new products from existing designs driven by market demand. As a result, the company is capable of driving its long-term revenue growth. The company’s another competitive advantage is that its design center and manufacturing base is situated in South Korea, which places it at the center of the global electronics device supply chain. As a result, the company is able to quickly and efficiently respond to its customers’ needs, which ensures its long-term revenue growth remains intact.
Fourth Quarter 2021 Financial Results
Magnachip reported fourth quarter 2021 revenue of $110.34 million, down 22.8% year-over-year, and non-GAAP EPS of $0.31, down 22.5% year-over-year. The company’s top-line and bottom-line both suffered due to severe supply chain constraints. The company’s display business witnessed slowdown in particular, which was partially offset by strong power business.
In 2021 the company took several initiatives to fuel long-term revenue and profitability growth. It broadened its customer-base and developed products for new applications, such as OLED TV and OLED Automotive. It enhanced its supply chain for additional 28nm manufacturing capacity, which is expected to come online in the second half of the current year. I believe these initiatives will drive the company’s long-term revenue and profitability growth significantly despite near-term supply chain-driven headwinds.
The company’s power business remained strong in 2021, driven by solid demand for the company’s most power products, and increased internal capacity. I expect the company’s power business will continue to remain strong in the coming years since its premium power products are showing steady demand momentum, and the company is launching new power products at an accelerated pace. In addition, the company will invest about $8 million of special capex in 2022 to further improve internal capacity to address consistently increasing demand for its power products.
Valuation
Magnachip’s peer group companies include, as mentioned above, ON Semiconductor, STMicroelectronics, Infineon Technologies, NXP Semiconductors, and Diodes Incorporated.
| MX | ON | STM | IFNNY | NXPI | DIOD | |
| GAAP TTM P/E | 13.85x | 26.25x | 19.65x | 28.31x | 26.89x | 16.95x |
| TTM Price to Sales | 1.58x | 3.76x | 3.01x | 3.31x | 4.47x | 2.10x |
| TTM Price to Cash Flow | 8.57x | 14.46x | 12.54x | 11.71x | 15.58x | 11.27x |
Data Source: Seeking Alpha
Magnachip is attractively valued compared to its peer group companies. It has a balance sheet comprising of $279.55 million of cash and $4.42 million of debt. The company is attractively valued since it remained unable to drive its revenue growth in the last five years. However, the next five years are expected to be different. With the company’s growing emphasis on developing next generation display and power products, its revenue is expected to grow from here, albeit at a modest rate. I expect its OLED display products and premium power products will drive its revenue growth at a CAGR of around 7% in the next five years.
According to a report:
The global OLED market size was valued at USD 38.4 billion in 2021 and is projected to reach USD 72.8 billion by 2026. It is expected to grow at a CAGR of 13.6% during the forecast period.
According to another report:
The power semiconductor market share is expected to increase by USD 10.48 billion from 2021 to 2026, and the market’s growth momentum will accelerate at a CAGR of 8.03%.
Magnachip’s OLED display and power businesses will boost the company’s long-term revenue growth significantly from today’s flat to slightly negative revenue growth. As a result, the company’s share price will move in the upward direction in the next five years.
Assuming Magnachip’s revenue will grow at a CAGR of around 7% in the next five years, I will find out the company’s long-term share price. The company’s trailing 12-month revenue is $474.20 million, and at a CAGR of 7% its beginning-2027 revenue will be $665.00 million, or $15.18 per share. In the last five years the company’s shares have traded between the price to sales multiples of 0.40x and 2.25x. Applying a price to sales multiple of 2.25x on Magnachip’s beginning-2027 revenue per share, I get $34.16 as the company’s beginning-2027 share price.
Risks
The company does not receive long-term purchase commitments from its customers, and order cancellations can occur at any time. Customers may also reduce quantities and seek delay in delivering orders. Cancellations, reductions or delays regarding orders by customers can negatively affect the company’s revenue growth and results of operations. Since many of the company’s products are customized, selling them in the general market isn’t possible, which exacerbates the risk.
The company relies on a limited number of key customers for its revenue generation. If the company loses one or a few key customers, or if such customers cease to place orders for the company’s high-volume products, particularly display products, the company’s revenue growth and profitability could be adversely affected.
Conclusion
The company’s OLED business remains strong with winning new customers and expanding into new applications. The demand from its current customers continues to remain strong, and I expect the company will be successful to capitalize on the opportunities the OLED market is presenting it. The company’s share price has significant long-term upside, and long-term investors can buy the company’s shares on pullbacks to maximize their profit.
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