UBS has released a research report downgrading Amkor Technology (AMKR.US) from "Buy" to "Neutral," while simultaneously raising its price target from $38 to $55. The bank noted that the recent stock price surge already reflects robust expectations for computing power growth, but cost and risk factors must now be weighed. The report points to imminent recovery momentum but emphasizes the need to balance this against costs and downside risks. Since its low in April 2025, Amkor's stock has surged 250%; however, UBS downgraded the rating to Neutral as the current price incorporates expectations for accelerated compute growth, recovery in smartphone SiP, cyclical mainstream market recovery, and the potential of a long-term project in Arizona. UBS believes the risk/reward profile is more appropriately neutral, citing several factors: the company's $7 billion Arizona project will likely lead to negative free cash flow for the coming years; potential memory price increases could impact PC/smartphone sales; and uncertainties around the sustained supply of US GPUs to China (accounting for 6% of 2026 sales) or the ability to secure TSMC's CoWoS-L packaging technology or a supply shift to ASE Technology. UBS anticipates strong growth in computing demand for 2026-2027. The bank raised its 2025 sales growth forecast from 5% to 6% year-over-year, while maintaining its 2026-2027 growth forecasts of 14% and 12%, respectively, which are above market expectations of 9% for both years. This optimism is primarily driven by rapidly growing compute demand, stabilization in the SiP/smartphone market, and recovery in the automotive/industrial sectors. The bank projects that advanced packaging (CoWoS-S/L/R and oS) could add $1 billion in sales (increasing from 5% to 16% of 2027 sales) within two years under a scenario where NVIDIA's H200 is approved, CPO switching occurs, the Vera CPU (using SPIL dual-source packaging), NVIDIA's N1/N1X/GB10, ASICs, and CoWoS-L TPU are all deployed by 2027, alongside growth in the oS business. Total compute power (including CPUs, switches, and networking) is expected to grow from 20% in 2025 to 28% by 2027. Conversely, growth in mature businesses is expected to be more moderate. The high growth from the compute segment is balanced by Amkor's core, lower-margin drivers: SiP (System-in-Package) for consumer electronics, smartphones, and the automotive/industrial sectors. The SiP business overlaps with Apple, accounting for 49% and 31% of sales respectively at the end of 2024, while automotive/industrial represented 19%. UBS forecasts a moderate recovery for 2026-2027: 1) Automotive/Industrial sales are expected to grow 10%/5% as post-COVID inventory normalizes and Amkor holds advantages in ADAS/infotainment; 2) Communications sales are projected to grow 11%/6% as the SiP business fully recovers in 2026, bolstered by Wi-Fi interfaces, new foldable/variable aperture cameras, and lower resistance compared to mainstream Android; 3) Consumer Electronics sales are anticipated to grow 4%/2%, facing a high comparison base from products like wearable earbuds. An extended investment cycle and high valuation limit further upside potential. Amkor's $7 billion, two-phase Arizona wafer fab is not expected to commence operations until 2028, with profitability beginning only in 2029. The first phase (potential revenue contribution of 10%), costing $3.5 billion, is eligible for a 35% tax credit and $407 million in government grants. UBS models approximately $1 billion in negative free cash flow from Q4 2025 to 2028, resulting in a cash yield below the current 1%. The rationale for the downgrade alongside a raised price target is based on a projected 2027 price-to-book ratio of 2.5x (implying a P/E of 20x), compared to a 2026 P/B of 2.5x (implying a P/E of 15x). It also factors in the high-end product line (including AI products) reaching 15-20% of sales by 2027, a return on equity improving from 7% in 2025 to 13% for 2026-2029, a comparison to peer ASE Technology's current 2026 P/E of 20x, and a cyclical EPS CAGR of 33% for 2025-2029.
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