Photronics (PLAB)

Semiconductor photomask manufacturer Photronics (NASDAQ:PLAB) met Wall Street’s revenue expectations in Q1 CY2025, but sales fell by 2.8% year on year to $211 million. On the other hand, next quarter’s revenue guidance of $204 million was less impressive, coming in 7.3% below analysts’ estimates. Its non-GAAP profit of $0.40 per share was 16.7% below analysts’ consensus estimates.

Company Overview

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

Photomask manufacturers that compete with Photonics include Compugraphics, Dai Nippon Printing (TSE:7912), Hoya Corporation (TSE:7741), LG Innotek (KOSE:A011070), and Shenzhen Newway Photomask (SHSE:688401).

A company’s long-term sales performance can indicate its overall quality. Even a bad business can shine for one or two quarters, but a top-tier one grows for years. Unfortunately, Photronics’s 7.5% annualized revenue growth over the last five years was mediocre. This wasn’t a great result compared to the rest of the semiconductor sector, but there are still things to like about Photronics. Semiconductors are a cyclical industry, and long-term investors should be prepared for periods of high growth followed by periods of revenue contractions.

We at StockStory place the most emphasis on long-term growth, but within semiconductors, a half-decade historical view may miss new demand cycles or industry trends like AI. Photronics’s recent performance shows its demand has slowed as its revenue was flat over the last two years.

This quarter, Photronics reported a rather uninspiring 2.8% year-on-year revenue decline to $211 million of revenue, in line with Wall Street’s estimates. Despite meeting estimates, the drop in sales could mean that the current downcycle is deepening. Company management is currently guiding for a 3.3% year-on-year decline in sales next quarter.

Looking further ahead, sell-side analysts expect revenue to grow 5% 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. At least the company is tracking well in other measures of financial health.

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 42, which is 4 days above its five-year average, suggesting that the company’s inventory has grown to higher levels than we’ve seen in the past.

In the semiconductor industry, a company’s gross profit margin is a critical metric to track because it sheds light on its pricing power, complexity of products, and ability to procure raw materials, equipment, and labor.

Photronics’s gross margin is well below other semiconductor companies, indicating a lack of pricing power and a competitive market. As you can see below, it averaged a 36.8% gross margin over the last two years. Said differently, Photronics had to pay a chunky $63.19 to its suppliers for every $100 in revenue.

This quarter, Photronics’s gross profit margin was 36.9%, in line with the same quarter last year. Zooming out, Photronics’s full-year margin has been trending down over the past 12 months, decreasing by 1 percentage points. If this move continues, it could suggest a more competitive environment with some pressure to lower prices and higher input costs (such as raw materials and manufacturing expenses).

Operating margin is one of the best measures of profitability because it tells us how much money a company takes home after procuring and manufacturing its products, marketing and selling those products, and most importantly, keeping them relevant through research and development.

Photronics has been an efficient company over the last two years. It was one of the more profitable businesses in the semiconductor sector, boasting an average operating margin of 26.4%. This result was particularly impressive because of its low gross margin, which is mostly a factor of what it sells and takes huge shifts to move meaningfully. Companies have more control over their operating margins, and it’s a show of well-managed operations if they’re high when gross margins are low.

Looking at the trend in its profitability, Photronics’s operating margin rose by 14.3 percentage points over the last five years, as its sales growth gave it operating leverage.

This quarter, Photronics generated an operating profit margin of 26.4%, in line with the same quarter last year. This indicates the company’s cost structure has recently been stable.

Revenue trends explain a company’s historical growth, but the long-term change in earnings per share (EPS) points to the profitability of that growth – for example, a company could inflate its sales through excessive spending on advertising and promotions.

Photronics’s EPS grew at a spectacular 31.7% compounded annual growth rate over the last five years, higher than its 7.5% annualized revenue growth. This tells us the company became more profitable on a per-share basis as it expanded.

Diving into Photronics’s quality of earnings can give us a better understanding of its performance. As we mentioned earlier, Photronics’s operating margin was flat this quarter but expanded by 14.3 percentage points over the last five years. On top of that, its share count shrank by 6.8%. These are positive signs for shareholders because improving profitability and share buybacks turbocharge EPS growth relative to revenue growth.

In Q1, Photronics reported EPS at $0.40, down from $0.46 in the same quarter last year. This print missed analysts’ estimates, but we care more about long-term EPS growth than short-term movements. Over the next 12 months, Wall Street expects Photronics’s full-year EPS of $2.02 to grow 2.5%.

Although earnings are undoubtedly valuable for assessing company performance, we believe cash is king because you can’t use accounting profits to pay the bills.

Photronics has shown decent cash profitability, giving it some flexibility to reinvest or return capital to investors. The company’s free cash flow margin averaged 15.1% over the last two years, slightly better than the broader semiconductor sector.

Taking a step back, we can see that Photronics’s margin expanded by 6.3 percentage points over the last five years. This is encouraging because it gives the company more optionality.

Photronics burned through $29.1 million of cash in Q1, equivalent to a negative 13.8% margin. The company’s cash flow turned negative after being positive 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 are more important.

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).

Photronics’s five-year average ROIC was 25.4%, beating other semiconductor companies by a wide margin. This illustrates its management team’s ability to invest in attractive growth opportunities and produce tangible results for shareholders.

Companies with more cash than debt have lower bankruptcy risk.

Photronics is a profitable, well-capitalized company with $558.4 million of cash and $30,000 of debt on its balance sheet. This $558.4 million net cash position is 43.8% 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 struggled to find many positives in these results. Its revenue guidance for next quarter missed and its EPS fell short of Wall Street’s estimates. Overall, this quarter could have been better. The stock traded down 5.4% to $19 immediately after reporting.

Updated: June 20, 2025 at 10:27 PM EDT

Are you wondering whether to buy Photronics or pass? We urge investors to not only consider the latest earnings results but also longer-term business quality and valuation as well.

In our opinion, Photronics is a good company. Although its revenue growth was mediocre over the last five years and analysts expect growth to slow over the next 12 months, its expanding operating margin shows the business has become more efficient. And while its low gross margins indicate some combination of pricing pressures or rising production costs, its impressive operating margins show it has a highly efficient business model.

Photronics’s P/E ratio based on the next 12 months is 8.8x. Looking at the semiconductor space right now, Photronics trades at a compelling valuation. If you’re a fan of the business and management team, now is a good time to scoop up some shares.

Wall Street analysts have a consensus one-year price target of $31 on the company (compared to the current share price of $18.20), implying they see 70.3% upside in buying Photronics in the short term.