Veeco Instruments Is Signaling Change May Be Underway (NASDAQ:VECO)

If Veeco Instruments Inc. (NASDAQ:VECO) is to end the year 2022 up, then it does not have a lot of time left to do it. The stock is down 35% YTD with only a couple of months left to go. However, there is reason to think the stock may try to cut down on some of those losses, especially with the last earnings report of the year not far away. Why will be covered next.

VECO stock may have bottomed

VECO, a supplier of semiconductor process equipment, has seen its stock fall in 2022, which is not that different from many other semis. The stock started out well, hitting a multi-year high in early January, but then went on to decline for most of the year. The chart below shows how the stock has lost 35% YTD in 2022. Note how the lower highs can be connected to form a descending trendline, a bearish pattern.

However, there are signs change is starting to get underway. The trend has been down all year, but that could be changing. The stock, for instance, has rallied in recent days by gaining a quick 8%. This helped VECO overtake the 20-day moving average, putting it one step closer to moving past the 50-day moving average, something that will be closely watched.

In addition, the stock may have posted a double bottom with the stock reversing course at approximately the same price level with the July low of $17.56 and the October low of $17.13. On both occasions, separated by three months or so, the stock bounced in the $16-18 region, suggesting the presence of support in this region.

Furthermore, if intraday lows are included, the 52-week low is $16.11, set on October 13. Note that even though the stock fell to a new 52-week low on October 13, the stock actually ended the day up at $17.85 because it was able to bounce off of what could only be support. On October 12 or the day before, the stock closed at $17.13, and on October 14 or the day after, the stock closed at $17.14, creating a distinct W-pattern on the charts.

All this could be interpreted as bullish action. The stock has been trending lower, but a double bottom suggests a trend reversal. Not only would it signal the end of the downtrend, but also the start of a possible uptrend. A move past the 50-day moving average and a move past the previously mentioned upper trendline, something that should happen if the stock maintains its current momentum, would further strengthen the conviction of and embolden the bulls

What could push the stock higher

It’s worth noting that while the stock is sending bullish signals, the downtrend is still in effect. The stock will need to maintain its recent momentum in order for say, the 50-day moving average to cross over the 200-day moving average, something many would consider a very bullish signal. This is where the upcoming earnings report in November could play a decisive role. A good report could propel the stock higher, but a disappointing one could easily send the stock lower.

Current estimates expect non-GAAP EPS of $0.41 and revenue of $170.8M. In comparison, VECO’s own guidance calls for Q3 revenue of $160-180M and non-GAAP EPS of $0.32-0.48 as shown in the table below. Remember that VECO surpassed the high end of its guidance in the last earnings report. It’s not expected to, but if VECO manages to surprise with a strong earnings beat and repeat what it did in the previous quarter, then that may just be enough to keep the stock going, potentially resulting in a break through the previously mentioned upper trendline and a crossing over of moving averages.

	Q3 FY2022 (guidance)	Q3 FY2021	YoY (midpoint)
Revenue	$160-180M	$150.2M	13.18%
GAAP EPS	$0.14-0.30	$0.17	29.41%
Non-GAAP EPS	$0.32-0.48	$0.40	–

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Source: VECO Form 8-K

Keep in mind that despite the appearance of headwinds like supply chain disruptions this year, VECO maintains the full-year guidance it issued for FY2022 earlier in the year. VECO still expects to earn $1.50-1.70 on revenue of $640-680M in FY2022. In comparison, VECO posted revenue of $583.3M and non-GAAP EPS of $1.43 in FY2021. From the Q2 earnings call:

“And now for some additional color beyond Q3, although supply chain challenges persist, we continue to experience strong demand for our products. And we’re reiterating our previously guided full year revenue range of $640 million to $680 million and diluted non-GAAP EPS range of $1.50 to $1.70 per share.”

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

However, it’s worth mentioning that VECO will need to step it up if it is to hit the aforementioned targets for FY2022. Non-GAAP EPS was only $0.73 after the first two quarters of FY2022. VECO will need the second half of FY2022 to be better than the first half if it is to end up with non-GAAP EPS of $1.50-1.70 in FY2022. The table below shows the quarterly numbers in recent quarters.

Note how non-GAAP EPS did not increase YoY despite the increase in revenue, in part due to lower gross margins. In contrast, GAAP EPS increased by 50% YoY in Q2 FY2022, but this can be attributed to much lower interest expense, which fell from $6.6M to $2.6M. This helped boost net income and EPS by extension.

Furthermore, share dilution is taking place at VECO. The GAAP weighted-average of shares outstanding, for instance, increased from 53.49M in Q2 FY2021 to 59.46M in Q2 FY2022. VECO had $231M in cash, cash equivalents and short-term investments on its balance sheet, offset by $310M in debt.

(GAAP)	Q2 FY2022	Q1 FY2022	Q2 FY2021	QoQ	YoY
Revenue	$163.999M	$156.426M	$146.344M	4.84%	12.06%
Gross margin	39.2%	42.2%	41.1%	(300bps)	(190bps)
Operating income	$12.823M	$16.517M	$13.252M	(22.36%)	(3.24%)
Net income	$9.655M	$13.330M	$6.348M	(27.57%)	52.10%
EPS	$0.18	$0.24	$0.12	(25.00%)	50.00%
(Non-GAAP)
Revenue	$163.999M	$156.426M	$146.344M	4.84%	12.06%
Gross margin	40.3%	43.1%	41.6%	(280bps)	(130bps)
Operating income	$22.979M	$24.727M	$21.297M	(7.07%)	7.90%
Net income	$19.975M	$21.702M	$17.905M	(7.96%)	11.56%
EPS	$0.35	$0.38	$0.35	(7.89%)	–

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Source: VECO Form 8-K

Why earnings could disappoint

While the top line grew by 12% YoY, a solid pace of growth, a look under the hood suggests growth may be in bigger danger than it appears to be. The table below breaks down Q2 revenue by end market, which shows how some end markets are doing much better than others. Growth was mostly driven by the semiconductor market with a YoY increase of 81.6%. In contrast, the data storage segment was the most problematic, with a YoY decline of 58.6%. In other words, the headline number does not tell the whole story.

End market (Unit: $1000)	Q2 FY2022	Q2 FY2021	YoY
Semiconductor	97,521	53,689	81.64%
Compound semiconductor	31,122	24,231	28.44%
Data storage	21,548	52,025	(58.58%)
Scientific & other	13,808	16,399	(15.80%)
Total	163,399	146,344	12.06%

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Source: VECO Form 10-Q

Problems in the data storage segment are likely to continue if guidance from companies like Western Digital (WDC) and Seagate (STX) are any indication. These two, together with TDK Headway, were the only companies to contribute 10% or more to revenue at VECO in the last few years, according to the latest Form 10-K. WDC, for instance, reported a 35% drop in the number of hard drives shipped in its most recent report and the forecast sees a further deterioration in market demand. STX is seeing similar things.

If VECO is to meet its FY2022 guidance, the semiconductor segment will need to keep compensating for weakness elsewhere. However, there is a possibility this may be a challenge with the semiconductor market showing signs of slowing down. More and more companies in the semiconductor industry are seeing weakening demand, even if many of them are still reporting solid gains in headline growth.

What this suggests is that the semiconductor segment may only be lagging behind what is already happening in the data storage segment. After all, if chip demand falls off, then so too will the demand for equipment from suppliers like VECO. It may not happen immediately, especially not with VECO sitting on a healthy backlog, but it will eventually.

VECO cannot use a drop in earnings

If the weakness reported in the data storage segment spreads to other segments, VECO will see multiples rise along with lower earnings, unless of course the stock price drops to compensate for lower earnings. The issue here is that while multiples are not high per se, they are not all that low either for VECO. The table below shows some of the multiples VECO trades at.

	VECO
Market cap	$950M
Enterprise value	$1,030M
Revenue (“ttm”)	$623.6M
EBITDA	$89.3M
Trailing P/E	24.50
Forward P/E	19.56
PEG ratio	0.08
P/S	1.47
P/B	2.26
EV/sales	1.65
Trailing EV/EBITDA	11.53
Forward EV/EBITDA	9.55

Click to enlarge

Source: Seeking Alpha

VECO’s balance sheet is not as good as it should be with more debt than cash as mentioned previously, which is why enterprise value of $1B exceeds its market cap of $950M. Still, VECO trades at 20 times forward earnings with a trailing P/E of 25. In comparison, the median P/E for the sector is 20. Valuations for VECO are not unreasonable, but they are also not what you would call a screaming buy.

Investor takeaways

I am neutral on VECO. The stock has been flashing a number of positive signals lately. The chart patterns appear to be in the process of transitioning from bearish action for most of the year towards what could eventually become a clear bull trend. The stock is currently in the middle between support and resistance, which leaves room for some sideways action in the coming weeks.

This could go on until the next earnings report and guidance, which could then trigger a break through resistance or a break down below support. At the moment, the stock remains in a downtrend despite the positive signals lately. While the stock is showing signs it wants to break the downtrend, it has yet to accomplish this.

While VECO is reporting solid headline growth, a closer look suggests VECO could ultimately fail to break through due to weakening market demand. The data storage and the semiconductor segment have diverged in terms of growth, but whether that can continue is doubtful. If the semiconductor market slows down as all signs suggest, the numbers at VECO will only get worse and not better.

Bottom line, VECO has given some reasons to be optimistic it may end the year on a strong note, but it has not given enough reasons to convince everyone now is the time to get in on VECO. Multiples are not enticing enough. Growth remains solid, but could be under imminent threat. Take all the above into account and it may be better to just wait it out.