Kulicke and Soffa Industries (NASDAQ: KLIC) Stock an Overlooked Semiconductor Buying Opportunity

Semiconductor equipment maker Kulicke and Soffa Industries NASDAQ: KLIC stock is an overlooked play on the surge in future semiconductor demand. Shares have underperformed the S&P 500 index NYSEARCA: SPY as peers are shaping up for a breakout. There’s no question the demand for semiconductors driven by accelerating trends including cloud migration and infrastructure, 5G upgrade and rollout cycles and data center optimization will require the precision equipment necessary to develop, manufacture and test the chips. Prudent investors that don’t want to “chase” overbought semiconductor stocks should consider placing bets on the “house” with the equipment makers. As earnings season approaches, watch for opportunistic pullback levels to consider getting exposure.

Q3 FY 2020 Earnings Release

On July 30, 2020, KLIC released its fiscal third-quarter 2020 results for the quarter ending June 2020. The Company reported an earnings-per-share (EPS) profit of $0.21 excluding non-recurring items versus consensus analyst estimates for a profit of $0.15, beating estimates by $0.06. Revenues grew 18.4% year-over-year (YoY) to $150.5 million meeting analyst estimates of $150.99 million. Cost control efforts results in lower operating expenses for the Q. The Company ended the quarter with $515.8 million in cash and investments. The stock repurchase program was further increased by another $100 million resulting in a total of approximately $151 million remaining in the buyback program.

Q3 2020 Conference Call Takeaways

Kulicke and Soffa President and CEO, Fusen Chen, noted that the robust demand macro and industry-related recovery and semiconductor unit growth is robust. Specifically, over 80% of global semiconductor packaging uses wire bonding process which plays right into its core market strengths. The pandemic was a uniquely historic outlier, but unit growth is expected to return to the 10% to 11% growth rate for both calendar years 2021 and 2022. The next-gen LED market has improved as evidenced by the largest LED tool shipment consisting of 25 Pixalux systems. During the quarter, capex equipment revenues declined (-1.6%) but aftermarket product and service revenues jumped 4%. The softness was in the memory and automotive end markets. 

Q4 2020 Guidance

Historically the September (Q4) quarter tends to contract (-19%) from the June (Q3) quarter. While COVID-19 has impacted visibility, the Company issued fiscal Q4 2020 guidance for revenues in the range of $155 million to $175 million versus consensus estimates of $165.67 million. The Company end markets have “not improved in lockstep”, they have collectively improved. The electronic vehicle (EV) market is bolstering demand requirements for “high-reliability and efficient power-control, power-storage and power-distribution applications”. These needs align with the Company core products especially the need for mini and micro-LED diodes. The Company anticipates a 40% compound average growth rate (CAGR) for this market with over 100 billion units shipped this year to grow to 1 trillion units by 2024. This underscores the ramping up for the Company’s mini and micro LED systems for this market

Growth Drivers

Kulicke and Soffa sees the key growth drivers in LED. The expansion of 5G rollouts is a near-term catalyst and memory is recovering. The historic nuance is the negative output between 2019 and 2020 due to the COVID-19 pandemic. The rebound is inevitable. The only question is timing. This “uncertainty” is what can present opportunistic pullback levels for prudent investors.

KLIC Opportunistic Pullback Levels

Using the rifle charts on the monthly and weekly time frames provides a broader view of the landscape for KLIC stock. The monthly rifle chart has a bullish stochastic mini pup trying to form a breakout with the rising 5-period moving average (MA) at $23.20 trying to cross the 15-period MA at $23.48. The weekly market structure low (MSL) buy triggered above the $22.50 Fibonacci (fib) level. This spike is causing the weekly stochastic to try to cross back up as the dual make or breaks on the monthly and weekly rifle charts seek a resolution. The dramatic spike is due for a reversion back to the weekly and monthly 15-period MA. This provides opportunistic pullback levels at the $23.37 fib, $22.50 weekly MSL/fib, $21.68 fib and the $20.41 super fib. The upside trajectories sit at the weekly and monthly upper Bollinger Bands (BBs) range from $26.70 to the $29.59 fib. To get a better idea of the general industry price action, keep an eye on peers KLA Corporation NASDAQ: KLAC and Applied Materials NASDAQ: AMAT as price action leaders to laggard KLIC. During the early 2000s, these were The Three Musketeers of the semiconductor equipment makers. That position correlation still exists today.