PDF Solutions: Needs To Turn It Around Soon To Keep The Bears At Bay

seekingalpha04-14

PDF Solutions has seen its stock decline in recent weeks after moving steadily higher since November of last year.The company has done fairly well considering the circumstances, but the same cannot be...

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Monty Rakusen/DigitalVision via Getty Images PDF Solutions (NASDAQ:PDFS), a provider of data solutions to the semiconductor industry, is wavering after a rally in the stock that started last November. Furthermore, there is reason to believe the change in the stock’s upwards direction did not happen by accident, but for a couple of reasons, which could ensure further weakness in the stock. Why will be covered next. Why the ground may have shifted for PDFS A previous article from last January rated PDFS a hold. The stock had put an end to the major decline that saw the stock lose almost half its value at one point last year, but there was reason to doubt whether the rebound that started last November would continue. Fast forward to the present and the article may have been on to something by thinking the stock may have further to fall because the stock has started to show signs of weakness in recent weeks as shown in the chart below. Source: Thinkorswim app The stock hit a new 2024 high of $35.89 as recently as March 8, 2024, building on the rally in the stock that started in November of last year after bottoming at $26.12 on October 31, 2023. However, the stock has slowly declined since then. Note how the price action has flipped from higher lows and higher highs, starting in November all the way to March 8, to the opposite with lower lows and lower highs. The stock has switched from leaning bullish to leaning bearish. There could be an explanation for why this has happened. As mentioned earlier, the recent rally in the stock followed a long decline that saw the stock drop from a high of $48.02 in July 2023 to a low of $26.12 in October 2023. The 50% Fibonacci retracement of this downtrend is $37.07, which is not far from where the stock peaked at $35.89 on March 8. In other words, resistance might be in play, with sellers drawing a line in the sand close to the 50% Fibonacci retracement level. Source: Thinkorswim app In addition, it’s also worth mentioning that the aforementioned downtrend, starting with the July 2023 high of $48.02 and ending with the October 2023 low of $26.12, may itself have been a retracement. Note how in the chart above, the aforementioned move downwards was preceded by a move upwards, which saw the stock rise from the June 2022 low of $19.34 to the July 2023 high of $48.02. The 76.4% Fibonacci retracement of $19.34 to $48.02 is $26.11, which is one cent below where the stock bottomed in October 2023 at $26.12. Furthermore, note the descending trendline in the above chart. The stock turned south once it got close to this trendline. Keep in mind, the stock has also fallen below the 50-day moving average, a bearish sign. If you add all this together, and it becomes clearer why some may conclude the stock could be heading lower in the short term. The above may be why some could argue the decline in the stock that started following the July 2023 high is still in effect and the recent rally in the stock is simply a temporary bounce that has not changed the prevailing trend in the direction of the stock. At this time, the chart pattern is leaning bearish in the short term. Bears will only be emboldened if the recent decline in the stock continues, as it would validate the above. The stock therefore needs to turn upwards again to put some doubt into the bears and reassure the bulls the recent upwards move in the stock is not finished. Otherwise, what started as a trickle could turn into a flood if more bears start to jump in. PDFS has seen its stock underperform PDFS has seen its stock appreciate by 3% YTD. This may not seem all that bad, but, with such a small gain, PDFS has actually underperformed against most semiconductor stocks in what has been a great year thus far for the sector. The underperformance started in the second half of 2023, and it has carried over into 2024. What’s interesting is that the stock’s relative weakness comes against the backdrop of outperformance by PDFS itself. The semiconductor industry had a down year in 2023 with worldwide semiconductor sales shrinking about 10% YoY, depending on the source, and most companies active in the semiconductor space saw sales shrink as a direct result. However, there were those who managed to buck the trend and PDFS was one of them. The table below shows how PDFS managed to do what few in the industry managed to accomplish in 2023, which is to grow the top and the bottom line. FY2023 revenue increased by 11.6% YoY and non-GAAP EPS increased by 21.7% YoY to $0.73. Analytics revenue contributed $152.1M and integrated yield ramp revenue contributed the remaining $13.8M. PDFS finished with cash, cash equivalents and short-term investments of $135.52M on the balance sheet with no debt.        (Unit: $1000, except for EPS, margins and shares)  (GAAP) FY2023 FY2022 YoY   Revenue 165,835 148,549 11.64%   Gross margin 69% 68% 100bps   Net income (loss) 3,105 (3,429) -   EPS 0.08 (0.09) -   Weighted-average shares outstanding 38,937K 37,309K 4.36%   (Non-GAAP)         Revenue 165,835 148,549 11.64%   Gross margin 73% 71% 200bps   Net income 28,470 22,924 24.19%   EPS 0.73 0.60 21.67%   Weighted-average shares outstanding 38,937K 38,130K 2.12%   Click to enlarge Source: PDFS Form 10-K To be fair, it is worth mentioning that PDFS is currently in somewhat of a soft patch in terms of business demand. The table below shows how revenue growth in the last quarter of FY2023 was much lower than that for the year as a whole. Q4 revenue increased by just 1.5% YoY, and it declined by 2.9% QoQ. Earnings were even worse off. Non-GAAP EPS declined by 21% YoY and by 25% QoQ.  (Unit: $1000, except for EPS, margins and shares)  (GAAP) Q4 FY2023 Q3 FY2023 Q4 FY2022 QoQ YoY   Revenue 41,125 42,350 40,523 (2.89%) 1.49%   Gross margin 68% 66% 71% 200bps (300bps)   Net income (loss) 887 (4,972) 483 - 83.64%   EPS 0.02 (0.13) 0.01 - 100.00%   Weighted-average shares outstanding 38,814K 38,187K 38,276K 1.64% 1.41%   (Non-GAAP)             Revenue 41,125 42,350 40,523 (2.89%) 1.49%   Gross margin 72% 70% 74% 200bps (200bps)   Net income 5,717 7,987 7,399 (28.42%) (22.73%)   EPS 0.15 0.20 0.19 (25.00%) (21.05%)   Weighted-average shares outstanding 38,814K 38,992K 38,276K (0.46%) 1.41%   Click to enlarge Source: PDFS Form 8-K What FY2024 could be like for PDFS The above numbers make it clear PDFS is in a soft patch and this is expected to last through the first half of the year with many customers reporting muted demand. However, demand is expected to pick up in the second half of the year. From the Q4 earnings call:  “Turning to our view of 2024, many of our fabless foundry and equipment customers are reporting relatively weak first half of 2024, and in many cases, customers are reporting Q1 will be down. They generally expect now that the second half of the year will return to growth. While some customers are experiencing near-term weakness, the long-term trends driven by increasingly intelligent semiconductor products that make AI possible, the electrification of the energy economy, and the geographic diversification of manufacturing are only accelerating.”  Source: PDFS earnings call Accordingly, the outlook from PDFS sees H2 FY2024 growing by 20% YoY after a flat H1 FY2024. This is expected to result in FY2024 growing at a pace similar to FY2023.  “Our outlook for the year reflects both the short-term weakness in the IC industry and the longer-term macro trends that can drive significant growth. Overall, we expect bookings for the year to be up significantly versus last year, and we expect to build backlog meaningfully. Our revenue model for the year suggests the first half of the year will be roughly flat when compared to the last year and growth returning to 20% on a year-over-year basis in the second half of the year. Overall, we expect double-digit growth for the year similar to last.”  Using the above as a guideline, FY2024 is estimated to end up at about $185M, assuming a growth rate similar to FY2023 or 11.6%. Non-GAAP EPS is also estimated to grow at a similar pace, which implies FY2024 EPS of about $0.82, up from $0.73 in FY2023. The stock closed at $33.24 on April 9, which translates to a forward non-GAAP P/E ratio of 40.5x and a trailing non-GAAP P/E ratio of 45.4x. Note that this is almost twice as much as the sector median, which stand at 24.9x and 22.3x respectively. Investor takeaways It has not been true lately, but it is still worth noting that the stock has appreciated in the six years or so following late 2018. The stock traded at $7.58 in October 2018 and the stock price has generally trended higher afterwards, despite periodic pullbacks in the stock. This rise in the stock price has been supported by steady growth at PDFS. Revenue, for instance, has grown each year since FY2019. This includes FY2023, when PDFS managed to grow even though the industry itself contracted. PDFS expects demand to remain muted in the first half of FY2024, which will result in H1 coming in flat, but the outlook for FY2024 sees PDFS growing at a rate similar to FY2023, or in the low teens, due to an expected acceleration in growth in H2. According to what customers have told PDFS, many are still dealing with soft demand. This has affected PDFS, as can be seen in recent quarterly statements, which indicate a slowdown underway. The advantage PDFS has it that it relies more on services to the industry, which provides a certain degree of resilience during a semiconductor downturn, even if PDFS is not completely immune to it. It’s also why gross margins are relatively high at PDFS. The above is why one could argue that PDFS deserves to trade at a higher multiple than many other semiconductor companies. PDFS has higher gross margins than most, and it tends to be less vulnerable to drops in chip demand. On the contrary, companies may want to seek out PDFS to help improve profitability during a downturn by raising, for instance, yield and overall efficiency in the production process. However, PDFS still trades at a forward P/E multiple that is roughly twice as high as the median in the sector. PDFS may also not have as much growth potential as some semiconductor plays that supply chips in high demand, like HBM memory or server GPUs. This could be one reason why PDFS may get passed over, especially by those who like to chase what is hot and what has momentum on its side. Perhaps more importantly, the charts are currently pointing to further weakness in the stock for PDFS. There is reason to believe the move upwards in the last six months was just a temporary bounce, and the preceding downtrend has yet to hit bottom. There is reason to believe the stock could be heading lower, with the stock under the 50-day moving average and the stock bouncing off of resistance. The price action of lower lows and lower highs does not inspire confidence.  Long PDFS might be worth considering at another time, but I am neutral on PDFS for now with the above in mind. The fact that the stock has underperformed for a whole year says it all. Long PDFS has not been worth it for some time, and there is reason to believe this could continue in the short term. Add this together, and it is hard to justify taking a shot at long PDFS at this time.","kind":null,"is_publish_news":null,"is_publish_highlight":null,"is_publish_live":null,"is_publish_wemedia":null,"editions":null,"symbols":[],"gpt_button":1},"commentList":[],"isCommentEnd":true,"newsSizeData":{"likeSize":0,"commentSize":0,"repostSize":0,"favoriteSize":0,"likeStatus":false,"favoriteStatus":false},"APP":{"userAgent":"Mozilla/5.0 AppleWebKit/537.36 (KHTML, like Gecko; compatible; ClaudeBot/1.0; +claudebot@anthropic.com)","isDev":false,"isTTM":true,"deviceId":"web-server-community-laohu8-v3","version":"4.22.4","shortVersion":"4.22.4","platform":"web","vendor":"web","appName":"ttm","isIOS":false,"isAndroid":false,"isTiger":false,"isTHS":false,"isWeiXin":false,"isWeiXinMini":false,"isWeiBo":false,"isQQ":false,"isBaiduSwan":false,"isBaiduBox":false,"isDingTalk":false,"isToutiao":false,"isOnePlus":false,"isHuaWei":false,"isXiaomi":false,"isXiaomiWebView":false,"isOppo":false,"isVivo":false,"isSamsung":false,"isMobile":false},"href":"/m/news/2427035308"}