Veeco Instruments Seems To Have Broken Through (NASDAQ:VECO)

Veeco Instruments Inc. (NASDAQ:VECO), a supplier of semiconductor process equipment, had a year to forget in 2022 in terms of the stock, but things already are looking up in 2023. Not only has VECO stock already gained 8% YTD, but it appears to have broken through a key resistance level that had kept it contained for a long time. However, while there are encouraging signs for Veeco Instruments Inc. out there for the bulls, there are also some less than encouraging developments out there. Why will be covered next.

VECO seems to have finally broken through

The year 2022 was a tough year for VECO, with the stock losing 35% of its value, but 2023 is shaping up to be something else, with the stock gaining 8% with a couple of weeks remaining in January. In comparison, the iShares PHLX Semiconductor ETF (SOXX) has gained 11% YTD after losing 36% in 2022.

In addition, Veeco Instruments Inc.’s stock has managed to break through resistance that had held it back for quite some time. The stock was having all sorts of problems moving past $20 or so, as shown in the chart below. There were multiple attempts in Q4 2022, but all of them failed to break and stay above resistance at around $20. That is, until the last few days, with VECO stock closing above $20 for four consecutive days.

Veeco Instruments Inc. stock appears to have breached resistance, which could encourage buyers to step in. However, Veeco Instruments Inc. stock has been retreating, and it may be going for a backtest of the previous resistance level. If the stock stays above prior resistance and the stock successfully completes the backtest, then this would likely embolden the bulls even more, since it would mean that what used to be resistance has now become support, a positive signal for those who are still hesitant to jump in.

On the other hand, the reverse is true if the backtest fails and the stock fails to find support where resistance used to be. A move back below resistance would imply a failed breakthrough, which is likely to encourage selling, especially by those who got in due to the perception that the stock had broken through.

VECO comes at a fair price

The Veeco Instruments Inc. charts seem to be turning bullish, which may be enough to convince buyers to get in on VECO, especially since VECO does not come at the cost of an arm and a leg. On the contrary, multiples for VECO are either in line with or below that of the median for the sector. The table below shows some of the multiples VECO trades at.

	VECO	Median
Market cap	$1.04B	–
Enterprise value	$1.08B	–
Revenue (“ttm”)	$645.3M	–
EBITDA	$91.9M	–
Trailing GAAP P/E	23.22	24.10
Forward GAAP P/E	25.30	24.76
PEG ratio	0.15	0.66
P/S	1.56	2.78
P/B	2.36	3.04
EV/sales	1.67	2.77
Trailing EV/EBITDA	11.75	13.90
Forward EV/EBITDA	10.71	13.35

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Source: Seeking Alpha

For instance, Veeco Instruments Inc. has an enterprise value of $1.08B, which is equal to 11 times EBITDA on a forward basis and 12 times EBITDA on a trailing basis, both less than the median. The stock is valued at 2.36 times book value, which is also below the median standing at 3.04 times book value. VECO may not be a bargain per se, but the asking price is certainly not unreasonable.

Those skeptical of VECO are on the rise

However, Veeco Instruments Inc. is not perfect. The stock has done better in recent months, especially in comparison to the earlier part of 2022, but there are those who seem to believe the rally is unwarranted and are betting against it for that reason. This is reflected in the rise in short interest. According to the most recent data, short interest rose from 2.97M shares at the end of August to 4.94M at the end of December after going down in the preceding months. This translates to a short float of almost 10%.

Short interest declined as the stock fell, but it is now back on the rise with the stock doing better. This suggests there are a growing number of people who are betting against the increase in the value of the stock. The stock has gone up, but as far as the shorts are concerned, the rally will not last and the stock is heading lower in the near future.

Why some are betting against VECO

Those betting against Veeco Instruments Inc. are likely to feel encouraged by recent forecasts, which predict the market for semiconductor manufacturing equipment will shrink by 15.9% YoY to $91.2B in 2023 after expanding by 5.9% YoY to $108.5B in 2022, a record high. The market is going down, and the numbers at VECO itself are consistent with this.

The recent numbers from VECO point to growth heading in the wrong direction. Consensus estimates expect non-GAAP EPS of $0.32 on revenue of $161M in Q4. EPS is expected to end up at $1.50 on revenue of $654M in FY2022. In comparison, VECO posted EPS of $1.43 on revenue of $583M in FY2021.

	Q4 FY2022 (guidance)	Q4 FY2021	YoY
Revenue	$150-170M	$153.0M	(1.96%)-11.11%
GAAP EPS	$0.05-0.23	$0.15	(66.67%)-53.33%
Non-GAAP EPS	$0.24-0.40	$0.43	(44.19%)-(6.98%)

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Source: VECO Form 8-K

VECO’s own guidance calls for Q4 revenue of $150-170M, an increase of 4.6% YoY at the midpoint. The forecast expects GAAP EPS of $0.05-0.23, a decline of 6.7% YoY at the midpoint, and non-GAAP EPS of $0.24-0.40, a decline of 25.6% YoY at the midpoint. The outlook suggests a further contraction is possible in Q1 FY2023. From the Q3 earnings call:

“And now for some additional color beyond Q4. Q1 revenue appears to be flat to slightly down from our Q4 2022 guide as we’re experiencing a slowdown in our 5G RF and Advanced Packaging markets.”

A transcript of the Q3 FY2022 earnings call can be found here.

Management provided some additional color as to the reasoning behind the outlook.

“As we look across our order book for the quarter, we see pockets of strength and in otherwise mixed demand environment. For example, we had multiple multisystem orders for our Laser Annealing systems for logic applications. We also had increased order activity in our data storage market for Ion Beam systems over the last two quarters.

At the same time, the weakness in consumer and mobile device markets is impacting our Wet Processing and Lithography product lines for 5G RF filters, Power Amplifiers and Advanced Packaging Applications. As such, we’ve seen corresponding push outs of shipments by one or two quarters and reduction in orders, which are impacting near-term revenue for these product lines.”

Basically, while there are pockets of strengths, VECO is also faced with customers asking for push outs or reductions in orders, which suggests demand is weakening. The numbers appear to be heading down, which explains why consensus estimates are leaning towards lower earnings in FY2023 with EPS forecasts anywhere between $1.15 to $1.50.

Note the wide range in guidance from VECO, which means the numbers could look better if the actual quarterly results come near the upper end of guidance, as they did in the preceding quarter. Q3 revenue increased by 14.4% YoY to $171.9M. GAAP EPS increased by 58.8% YoY to $0.27 and non-GAAP EPS increased by 12.5% YoY to $0.45. The table below shows the numbers for Q3 FY2022.

(GAAP)	Q3 FY2022	Q2 FY2022	Q3 FY2021	QoQ	YoY
Revenue	$171.913M	$163.999M	$150.246M	4.83%	14.42%
Gross margin	40.7%	39.2%	42.0%	150bps	(130bps)
Operating income	$17.654M	$12.823M	$16.416M	37.67%	7.54%
Net income	$15.041M	$9.655M	$8.993M	55.78%	67.25%
EPS	$0.27	$0.18	$0.17	50.00%	58.82%
(Non-GAAP)
Revenue	$171.913M	$163.999M	$150.246M	4.83%	14.42%
Gross margin	42.0%	40.3%	42.6%	170bps	(60bps)
Operating income	$28.362M	$22.979M	$24.309M	23.43%	16.67%
Net income	$26.008M	$19.975M	$20.474M	30.20%	27.03%
EPS	$0.45	$0.35	$0.40	28.57%	12.50%

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Source: VECO

Note that shares were diluted. The GAAP weighted-average of shares outstanding rose from 53.85M to 65.15M YoY and the non-GAAP weighted-average of shares outstanding rose from 51.68M to 63.48M YoY. VECO finished Q3 with cash, cash equivalents and short-term investments of $272M, which came close to negating the long-term debt, which stood at $274M on the balance sheet.

Investor takeaways

A previous article from October concluded that even though Veeco Instruments Inc. stock had trended lower, there was reason to believe a change was on the way. For instance, the chart patterns suggested the stock had double-bottomed, which would pave the way for the stock to end the year on a high note. This turned out to be correct, with the stock having rallied since then off the October lows. The rally has continued in 2023 with the stock breaking through resistance, which had contained the stock for months.

If the stock can show that what used to be resistance has become support with a successful backtest, then the bulls are likely to become even more confident that the stock is heading higher, and thus more likely to increase their bets accordingly. In addition, they are even more likely to do so with multiples that are not unreasonably high, as is the case right now.

However, there is a reason why short interest has gone up along with the stock. The equipment market looks to have peaked in 2022 and it is now projected to contract in 2023 by double digits. VECO’s own quarterly results and guidance suggests the numbers are set to deteriorate. Forward projections call for EPS to contract in 2023. It is also not clear how long the downturn in the market will last.

There are some forecasts which predict a rebound in semiconductor demand starting in the second half of 2023. But at this time, there is no hard evidence a recovery is in sight. As long as semiconductor demand stays weak, chipmakers are unlikely to invest much in new equipment to make chips, unlike recent years. If the equipment market is to rebound for companies like VECO, there has to be a rebound in demand for semiconductors. There is no evidence this is the case.

I remain neutral on Veeco Instruments Inc. despite some encouraging developments. The reality is that it will be hard for Veeco Instruments Inc. to keep earnings from shrinking with the current state of the market for semiconductors. While it may be possible for Veeco Instruments Inc. stock to go on temporary rallies, it will be hard-pressed to keep going if earnings are under pressure. Standing on the sidelines is best when this is the case.