Photronics (NASDAQ:PLAB) Misses Q3 Sales Targets, Stock Drops

Semiconductor photomask manufacturer Photronics (NASDAQ:PLAB) fell short of analysts' expectations in Q3 FY2023, with revenue up 1.94% year on year to $224.2 million. Turning to EPS, Photronics made a GAAP profit of $0.44 per share, down from its profit of $0.51 per share in the same quarter last year.

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“The Photronics team performed well in the third quarter, maintaining strong margins in an environment where we experienced a temporary demand slowdown in some of our end markets,” said Frank Lee, chief executive officer.

Sporting a global footprint of facilities, Photronics (NASDAQ:PLAB) is a manufacturer of photomasks, templates used to transfer patterns onto semiconductor wafers.

The semiconductor industry is driven by demand for advanced electronic products like smartphones, PCs, servers and data storage. The growth of data and technologies like artificial intelligence, 5G networks and smart cars are also creating a next wave of growth for the industry. To keep up with ever changing customer needs requires new tools that can design, fabricate and test at ever smaller sizes and more complex architectures, and that is driving the demand for semiconductor capital manufacturing equipment.

Sales Growth

Photronics's revenue growth over the last three years has been unremarkable, averaging 12.9% annually. As you can see below, this was a weaker quarter for the company, with revenue growing from $219.9 million in the same quarter last year to $224.2 million. Semiconductors are a cyclical industry, and long-term investors should be prepared for periods of high growth followed by periods of revenue contractions (which can sometimes offer opportune times to buy).

Photronics had a tough quarter as its weak 1.94% year-on-year revenue growth missed analysts' estimates by 2.52%. This marks 10 straight quarters of growth, showing that the current upcycle has had a good run, as a typical upcycle usually lasts 8-10 quarters.

Photronics's management team believes its revenue growth will accelerate even more, guiding to 7.96% year-on-year growth next quarter. This compares to analysts' estimates of 4.8% growth over the next 12 months.

The pandemic fundamentally changed several consumer habits. There is a founder-led company that is massively benefiting from this shift. The business has grown astonishingly fast, with 40%+ free cash flow margins. Its fundamentals are undoubtedly best-in-class. Still, the total addressable market is so big that the company has room to grow many times in size. You can find it on our platform for free.

Product Demand & Outstanding Inventory

Days Inventory Outstanding (DIO) is an important metric for chipmakers, as it reflects a business' capital intensity and the cyclical nature of semiconductor supply and demand. In a tight supply environment, inventories tend to be stable, allowing chipmakers to exert pricing power. Steadily increasing DIO can be a warning sign that demand is weak, and if inventories continue to rise, the company may have to downsize production.

This quarter, Photronics's DIO came in at 37, which is in line with its five-year average. These numbers show that despite the recent increase, there's no indication of an unusual inventory buildup.

Key Takeaways from Photronics's Q3 Results

Sporting a market capitalization of $1.47 billion, Photronics is among smaller companies, but its more than $475.8 million in cash on hand and positive free cash flow over the last 12 months puts it in an attractive position to invest in growth.

Photronics missed on revenue and EPS, blaming "a temporary demand slowdown in some of our end markets" and saying that "softer mainstream demand more than offset high-end growth in Asia". Revenue guidance for next quarter also underwhelmed by missing Wall Street's estimates. On a positive note, operating margin improved. Overall, this was a bad quarter for Photronics. The company is down 9.61% on the results and currently trades at $21.25 per share.

Photronics may have had a tough quarter, but does that actually create an opportunity to invest right now? When making that decision, it's important to consider its valuation, business qualities, as well as what has happened in the latest quarter. We cover that in our actionable full research report which you can read here, it's free.

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The author has no position in any of the stocks mentioned in this report.