Advanced Energy (AEIS)

Manufacturing equipment and systems provider Advanced Energy (NASDAQ:AEIS) beat Wall Street’s revenue expectations in Q1 CY2025, with sales up 23.6% year on year to $404.6 million. On top of that, next quarter’s revenue guidance ($420 million at the midpoint) was surprisingly good and 5.4% above what analysts were expecting. Its non-GAAP profit of $1.23 per share was 16.1% above analysts’ consensus estimates.

Company Overview

Pioneering technologies for radio frequency power delivery, Advanced Energy (NASDAQ:AEIS) provides power supplies, thermal management systems, and measurement and control instruments for various manufacturing processes.

Like many equipment and component manufacturers, electronic components companies are buoyed by secular trends such as connectivity and industrial automation. More specific pockets of strong demand include data centers and telecommunications, which can benefit companies whose optical and transceiver offerings fit those markets. But like the broader industrials sector, these companies are also at the whim of economic cycles. Consumer spending, for example, can greatly impact these companies’ volumes.

Competitors offering similar products include MKS Instruments (NASDAQ:MKSI), AMETEK (NYSE:AME), and Veeco Instruments (NASDAQ:VECO).

A company’s long-term sales performance can indicate its overall quality. Any business can put up a good quarter or two, but many enduring ones grow for years. Thankfully, Advanced Energy’s 10.1% annualized revenue growth over the last five years was solid. Its growth beat the average industrials company and shows its offerings resonate with customers.

Long-term growth is the most important, but within industrials, a half-decade historical view may miss new industry trends or demand cycles. Advanced Energy’s recent performance marks a sharp pivot from its five-year trend as its revenue has shown annualized declines of 8.8% over the last two years. Advanced Energy isn’t alone in its struggles as the Electronic Components industry experienced a cyclical downturn, with many similar businesses observing lower sales at this time.

We can dig further into the company’s revenue dynamics by analyzing its most important segments, Semiconductor Equipment and Industrial and Medical Equipment, which are 54.9% and 15.9% of revenue. Over the last two years, Advanced Energy’s Semiconductor Equipment revenue (i.e., plasma power) averaged 2.8% year-on-year declines while its Industrial and Medical Equipment revenue (i.e., robotics) averaged 18.3% declines.

This quarter, Advanced Energy reported robust year-on-year revenue growth of 23.6%, and its $404.6 million of revenue topped Wall Street estimates by 3.7%. Company management is currently guiding for a 15.1% year-on-year increase in sales next quarter.

Looking further ahead, sell-side analysts expect revenue to grow 5.6% over the next 12 months. While this projection suggests its newer products and services will fuel better top-line performance, it is still below the sector average.

Advanced Energy’s unit economics are great compared to the broader industrials sector and signal that it enjoys product differentiation through quality or brand. As you can see below, it averaged an excellent 36.9% gross margin over the last five years. Said differently, roughly $36.94 was left to spend on selling, marketing, R&D, and general administrative overhead for every $100 in revenue.

This quarter, Advanced Energy’s gross profit margin was 37.2%, up 2.3 percentage points year on year. Advanced Energy’s full-year margin has also been trending up over the past 12 months, increasing by 1.1 percentage points. If this move continues, it could suggest better unit economics due to more leverage from its growing sales on the fixed portion of its cost of goods sold (such as manufacturing expenses).

Operating margin is an important measure of profitability as it shows the portion of revenue left after accounting for all core expenses – everything from the cost of goods sold to advertising and wages. It’s also useful for comparing profitability across companies with different levels of debt and tax rates because it excludes interest and taxes.

Advanced Energy has done a decent job managing its cost base over the last five years. The company has produced an average operating margin of 9%, higher than the broader industrials sector.

Looking at the trend in its profitability, Advanced Energy’s operating margin decreased by 9.1 percentage points over the last five years. This raises questions about the company’s expense base because its revenue growth should have given it leverage on its fixed costs, resulting in better economies of scale and profitability.

This quarter, Advanced Energy generated an operating profit margin of 7.6%, up 7.4 percentage points year on year. The increase was solid, and because its operating margin rose more than its gross margin, we can infer it was more efficient with expenses such as marketing, R&D, and administrative overhead.

We track the long-term change in earnings per share (EPS) for the same reason as long-term revenue growth. Compared to revenue, however, EPS highlights whether a company’s growth is profitable.

Advanced Energy’s decent 9.5% annual EPS growth over the last five years aligns with its revenue performance. This tells us it maintained its per-share profitability as it expanded.

Like with revenue, we analyze EPS over a more recent period because it can provide insight into an emerging theme or development for the business.

Advanced Energy’s two-year annual EPS declines of 18.2% were bad and lower than its two-year revenue performance.

In Q1, Advanced Energy reported EPS at $1.23, up from $0.58 in the same quarter last year. This print easily cleared analysts’ estimates, and shareholders should be content with the results. Over the next 12 months, Wall Street expects Advanced Energy’s full-year EPS of $4.35 to grow 15.1%.

If you’ve followed StockStory for a while, you know we emphasize free cash flow. Why, you ask? We believe that in the end, cash is king, and you can’t use accounting profits to pay the bills.

Advanced Energy has shown decent cash profitability, giving it some flexibility to reinvest or return capital to investors. The company’s free cash flow margin averaged 7.7% over the last five years, slightly better than the broader industrials sector.

Taking a step back, we can see that Advanced Energy’s margin dropped by 6.6 percentage points during that time. Continued declines could signal it is in the middle of an investment cycle.

Advanced Energy’s free cash flow clocked in at $15 million in Q1, equivalent to a 3.7% margin. Its cash flow turned positive after being negative in the same quarter last year, but we wouldn’t read too much into the short term because investment needs can be seasonal, causing temporary swings. Long-term trends trump fluctuations.

EPS and free cash flow tell us whether a company was profitable while growing its revenue. But was it capital-efficient? Enter ROIC, a metric showing how much operating profit a company generates relative to the money it has raised (debt and equity).

Although Advanced Energy hasn’t been the highest-quality company lately, it historically found a few growth initiatives that worked out well. Its five-year average ROIC was 14.1%, impressive for an industrials business.

We like to invest in businesses with high returns, but the trend in a company’s ROIC is what often surprises the market and moves the stock price. Unfortunately, Advanced Energy’s ROIC has decreased significantly over the last few years. We like what management has done in the past, but its declining returns are perhaps a symptom of fewer profitable growth opportunities.

Businesses that maintain a cash surplus face reduced bankruptcy risk.

Advanced Energy is a profitable, well-capitalized company with $723 million of cash and $584.6 million of debt on its balance sheet. This $138.4 million net cash position is 3.8% of its market cap and gives it the freedom to borrow money, return capital to shareholders, or invest in growth initiatives. Leverage is not an issue here.

We were impressed by Advanced Energy’s optimistic EPS guidance for next quarter, which blew past analysts’ expectations. We were also excited its adjusted operating income outperformed Wall Street’s estimates by a wide margin. Zooming out, we think this was a solid quarter. The stock traded up 4.5% to $101.96 immediately after reporting.

Updated: May 21, 2025 at 11:31 PM EDT

Before making an investment decision, investors should account for Advanced Energy’s business fundamentals and valuation in addition to what happened in the latest quarter.

We cheer for all companies making their customers lives easier, but in the case of Advanced Energy, we’ll be cheering from the sidelines. Although its revenue growth was solid over the last five years, it’s expected to deteriorate over the next 12 months and its diminishing returns show management's prior bets haven't worked out. And while the company’s projected EPS for the next year implies the company’s fundamentals will improve, the downside is its declining operating margin shows the business has become less efficient.

Advanced Energy’s P/E ratio based on the next 12 months is 23.2x. At this valuation, there’s a lot of good news priced in - we think there are better stocks to buy right now.

Wall Street analysts have a consensus one-year price target of $124.10 on the company (compared to the current share price of $114.30).

Want to invest in a High Quality big tech company? We’d point you in the direction of Microsoft and Google, which have durable competitive moats and strong fundamentals, factors that are large determinants of long-term market outperformance.

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