Photronics (PLAB)

Semiconductor photomask manufacturer Photronics (NASDAQ:PLAB) beat Wall Street’s revenue expectations in Q4 CY2024, but sales fell by 1.9% year on year to $212.1 million. On the other hand, next quarter’s revenue guidance of $212 million was less impressive, coming in 5.8% below analysts’ estimates. Its non-GAAP profit of $0.52 per share was 10.6% 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 performance is an indicator of its overall quality. Any business can experience short-term success, but top-performing ones enjoy sustained growth for years. Luckily, Photronics’s sales grew at a decent 8.1% compounded annual growth rate over the last five years. 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 shows its demand has slowed as its revenue was flat over the last two years.

This quarter, Photronics’s revenue fell by 1.9% year on year to $212.1 million but beat Wall Street’s estimates by 1%. Despite the beat, the drop in sales could mean that the current downcycle is deepening. Company management is currently guiding for a 2.3% year-on-year decline in sales next quarter.

Looking further ahead, sell-side analysts expect revenue to grow 8.4% over the next 12 months, an improvement versus the last two years. This projection is above average for the sector and implies its newer products and services will catalyze better top-line performance.

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 38, 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.

Gross profit margin is a key metric to track because it shows how much money a semiconductor company gets to keep after paying for its raw materials, manufacturing, and other input costs.

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 37% gross margin over the last two years. Said differently, Photronics had to pay a chunky $62.98 to its suppliers for every $100 in revenue.

This quarter, Photronics’s gross profit margin was 35.6%, down 1 percentage points year on year. Photronics’s full-year margin has also been trending down over the past 12 months, decreasing by 1.6 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).

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 26.7%. 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.

Analyzing the trend in its profitability, Photronics’s operating margin rose by 15.2 percentage points over the last five years, as its sales growth gave it immense operating leverage.

In Q4, Photronics generated an operating profit margin of 24.6%, down 2 percentage points year on year. Since Photronics’s operating margin decreased more than its gross margin, we can assume it was less efficient because expenses such as marketing, R&D, and administrative overhead increased.

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 remarkable 31% compounded annual growth rate over the last five years, higher than its 8.1% 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 declined this quarter but expanded by 15.2 percentage points over the last five years. Its share count also shrank by 5.7%, and these factors together are positive signs for shareholders because improving profitability and share buybacks turbocharge EPS growth relative to revenue growth.

In Q4, Photronics reported EPS at $0.52, up from $0.48 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 Photronics’s full-year EPS of $2.08 to grow 3.8%.

Free cash flow isn't a prominently featured metric in company financials and earnings releases, but we think it's telling because it accounts for all operating and capital expenses, making it tough to manipulate. Cash is king.

Photronics has shown impressive cash profitability, and if maintainable, will be in a position to ride out cyclical downturns more easily while continuing to invest in new and existing products. The company’s free cash flow margin averaged 19.8% over the last two years, better than the broader semiconductor sector.

Taking a step back, we can see that Photronics’s margin expanded by 9.7 percentage points over the last five years. This is encouraging because it gives the company more optionality.

Photronics’s free cash flow clocked in at $43.27 million in Q4, equivalent to a 20.4% margin. This result was good as its margin was 21.2 percentage points higher than in the same quarter last year, building on its favorable historical trend.

EPS and free cash flow tell us whether a company was profitable while growing its revenue. But was it capital-efficient? A company’s ROIC explains this by showing how much operating profit it makes compared to the money it has raised (debt and equity).

Photronics’s five-year average ROIC was 23.8%, 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.

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

Photronics is a profitable, well-capitalized company with $642.2 million of cash and $2.65 million of debt on its balance sheet. This $639.5 million net cash position is 48.8% 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 how significantly Photronics blew past analysts’ EPS expectations this quarter. We were also happy its revenue narrowly outperformed Wall Street’s estimates. On the other hand, its revenue guidance for next quarter missed significantly and its inventory levels increased. Overall, this was a weaker quarter. The stock remained flat at $20.41 immediately following the results.

Updated: May 16, 2025 at 10:28 PM EDT

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

Photronics is a fine business. To begin with, the its revenue growth was decent over the last five years, and analysts believe it can continue growing at these levels. And while its gross margins are lower than its semiconductor peers, its expanding operating margin shows the business has become more efficient. On top of that, its rising cash profitability gives it more optionality.

Photronics’s P/E ratio based on the next 12 months is 9.5x. When scanning the semiconductor space, Photronics trades at a fair valuation. For those confident in the business and its management team, this is a good time to invest.

Wall Street analysts have a consensus one-year price target of $35 on the company (compared to the current share price of $20.15), implying they see 73.7% upside in buying Photronics in the short term.

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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