Photronics (PLAB)

Semiconductor photomask manufacturer Photronics (NASDAQ:PLAB) reported Q4 CY2025 results beating Wall Street’s revenue expectations, with sales up 6.1% year on year to $225.1 million. The company expects next quarter’s revenue to be around $216 million, close to analysts’ estimates. Its non-GAAP profit of $0.61 per share was 15.1% above 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. Any business can have short-term success, but a top-tier one grows for years. Thankfully, Photronics’s 7.4% annualized revenue growth over the last five years was decent. Its growth was slightly above the average semiconductor company and shows its offerings resonate with customers. 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 marks a sharp pivot from its five-year trend as its revenue has shown annualized declines of 2% over the last two years.

This quarter, Photronics reported year-on-year revenue growth of 6.1%, and its $225.1 million of revenue exceeded Wall Street’s estimates by 2.3%. Adding to the positive news, Photronics’s growth inflected positively this quarter, news that will likely give some shareholders hope. Company management is currently guiding for a 2.4% year-on-year increase in sales next quarter.

Looking further ahead, sell-side analysts expect revenue to grow 4.3% over the next 12 months. While this projection suggests its newer products and services will spur better top-line performance, it is still below average for the sector.

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 39, which is one day above its five-year average. At the moment, these numbers show no indication of an excessive inventory buildup.

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 one of the worst in the semiconductor industry, signaling it operates in a competitive market and lacks pricing power. As you can see below, it averaged a 35.7% gross margin over the last two years. Said differently, Photronics had to pay a chunky $64.33 to its suppliers for every $100 in revenue.

Photronics produced a 35% gross profit margin in Q4, in line with the same quarter last year. On a wider time horizon, 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 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.

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 24.8%. 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 7.7 percentage points over the last five years, as its sales growth gave it operating leverage.

In Q4, Photronics generated an operating margin profit margin of 24.4%, in line with the same quarter last year. This indicates the company’s cost structure has recently been stable.

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.

Photronics’s EPS grew at an astounding 33.5% compounded annual growth rate over the last five years, higher than its 7.4% annualized revenue growth. This tells us the company became more profitable on a per-share basis as it expanded.

Diving into the nuances of Photronics’s 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 7.7 percentage points over the last five years. On top of that, its share count shrank by 7.3%. These are positive signs for shareholders because improving profitability and share buybacks turbocharge EPS growth relative to revenue growth.

In Q4, Photronics reported adjusted EPS of $0.61, up from $0.52 in the same quarter last year. This print easily cleared analysts’ estimates, and shareholders should be content with the results. We also like to analyze expected EPS growth based on Wall Street analysts’ consensus projections, but there is insufficient data.

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.

Photronics has shown mediocre cash profitability over the last two years, giving the company limited opportunities to return capital to shareholders. Its free cash flow margin averaged 14%, subpar for a semiconductor business. The divergence from its good operating margin stems from its capital-intensive business model, which requires Photronics to make large cash investments in working capital and capital expenditures.

Photronics’s free cash flow clocked in at $49.62 million in Q4, equivalent to a 22% margin. This result was good as its margin was 1.7 percentage points higher than in the same quarter last year, but we wouldn’t put too much weight on 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 Photronics 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 28.8%, impressive for a semiconductor business.

One of the best ways to mitigate bankruptcy risk is to hold more cash than debt.

Photronics is a profitable, well-capitalized company with $636.9 million of cash and $21,000 of debt on its balance sheet. This $636.9 million net cash position is 28.9% 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.

It was good to see Photronics beat analysts’ EPS expectations this quarter. We were also happy its revenue outperformed Wall Street’s estimates. Overall, we think this was a decent quarter with some key metrics above expectations. The stock traded up 6.8% to $40.56 immediately following the results.

We think that the latest earnings result is only one piece of the bigger puzzle. If you’re deciding whether to own Photronics, you should also grasp the company’s longer-term business quality and valuation.

Photronics has some positive attributes, but it isn’t one of our picks. To kick things off, its revenue growth was decent over the last five years. And while Photronics’s projected EPS for the next year is lacking, its astounding EPS growth over the last five years shows its profits are trickling down to shareholders.

Photronics’s price-to-sales ratio based on the trailing 12 months is 2.6x. The market typically values companies like Photronics based on their anticipated profits for the next 12 months, but there aren’t enough published estimates to arrive at a reliable number. You should avoid this stock for now - better opportunities lie elsewhere.

Wall Street analysts have a consensus one-year price target of $42 on the company (compared to the current share price of $40.56).