Magnachip (MX)

Semiconductor manufacturer Magnachip Semiconductor (NYSE:MX) met Wall Street’s revenue expectations in Q1 CY2025, but sales fell by 8.9% year on year to $44.72 million. On the other hand, next quarter’s revenue guidance of $47 million was less impressive, coming in 1.6% below analysts’ estimates. Its non-GAAP loss of $0.10 per share was 54.5% above analysts’ consensus estimates.

Company Overview

With its technology found in common consumer electronics such as TVs and smartphones, Magnachip Semiconductor (NYSE:MX) is a provider of analog and mixed-signal semiconductors.

Competitors offering analog and mixed-signal semiconductors for display and power management include Diodes (NASDAQ:DIOD), Infineon Technologies (XTRA:IFX), and Novatek Microelectronics (TWSE:3034).

Reviewing a company’s long-term sales performance reveals insights into its quality. Even a bad business can shine for one or two quarters, but a top-tier one grows for years. Magnachip’s demand was weak over the last five years as its sales fell at a 17.6% annual rate. This was below our standards and is a sign of poor business quality. Semiconductors are a cyclical industry, and long-term investors should be prepared for periods of high growth followed by periods of revenue contractions.

Long-term growth is the most important, but short-term results matter for semiconductors because the rapid pace of technological innovation (Moore's Law) could make yesterday's hit product obsolete today. Magnachip’s annualized revenue declines of 11.5% over the last two years suggest its demand continued shrinking.

This quarter, Magnachip reported a rather uninspiring 8.9% year-on-year revenue decline to $44.72 million of revenue, in line with Wall Street’s estimates. Company management is currently guiding for a 11.6% year-on-year decline in sales next quarter.

Looking further ahead, sell-side analysts expect revenue to decline by 10.9% over the next 12 months, similar to its two-year rate. This projection is underwhelming and indicates its newer products and services will not accelerate its top-line performance yet.

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, Magnachip’s DIO came in at 84, which is 24 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.

Magnachip’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 22.4% gross margin over the last two years. Said differently, Magnachip had to pay a chunky $77.57 to its suppliers for every $100 in revenue.

Magnachip produced a 20.9% gross profit margin in Q1, up 2.7 percentage points year on year. Magnachip’s full-year margin has also been trending up over the past 12 months, increasing by 1.2 percentage points. If this move continues, it could suggest better unit economics due to some combination of stable to improving pricing power and input costs (such as raw materials).

Magnachip’s high expenses have contributed to an average operating margin of negative 21.2% over the last two years. Unprofitable semiconductor companies require extra attention because they could get caught swimming naked when the tide goes out. It’s hard to trust that the business can endure a full cycle.

Looking at the trend in its profitability, Magnachip’s operating margin decreased by 23.9 percentage points over the last five years. Magnachip’s performance was poor no matter how you look at it - it shows that costs were rising and it couldn’t pass them onto its customers.

In Q1, Magnachip generated a negative 14.1% operating margin. The company's consistent lack of profits raise a flag.

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.

Sadly for Magnachip, its EPS declined by 26% annually over the last five years, more than its revenue. This tells us the company struggled because its fixed cost base made it difficult to adjust to shrinking demand.

Diving into the nuances of Magnachip’s earnings can give us a better understanding of its performance. As we mentioned earlier, Magnachip’s operating margin improved this quarter but declined by 23.9 percentage points over the last five years. Its share count also grew by 5.7%, meaning the company not only became less efficient with its operating expenses but also diluted its shareholders.

In Q1, Magnachip reported EPS at negative $0.10, up from negative $0.28 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 is optimistic. Analysts forecast Magnachip’s full-year EPS of negative $0.58 will reach break even.

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.

Magnachip’s demanding reinvestments have drained its resources over the last two years, putting it in a pinch and limiting its ability to return capital to investors. Its free cash flow margin averaged negative 9%, meaning it lit $8.97 of cash on fire for every $100 in revenue.

Taking a step back, we can see that Magnachip’s margin dropped by 2.8 percentage points over the last five years. It may have ticked higher more recently, but shareholders are likely hoping for its margin to at least revert to its historical level. Almost any movement in the wrong direction is undesirable because it’s already burning cash. If the longer-term trend returns, it could signal it’s in the middle of an investment cycle.

Magnachip burned through $4.88 million of cash in Q1, equivalent to a negative 10.9% margin. The company’s cash burn was similar to its $4.64 million of lost cash in the same quarter last year.

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).

Magnachip’s five-year average ROIC was negative 2.1%, meaning management lost money while trying to expand the business. Its returns were among the worst in the semiconductor sector.

Companies with more cash than debt have lower bankruptcy risk.

Magnachip is a well-capitalized company with $132.7 million of cash and $30.85 million of debt on its balance sheet. This $101.8 million net cash position is 84.9% 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.

We were impressed by how significantly Magnachip blew past analysts’ EPS and EBITDA expectations this quarter. On the other hand, its revenue guidance for next quarter missed and its inventory levels increased. Overall, this print was mixed but still had some key positives. The stock traded up 4.8% to $3.50 immediately after reporting.

Updated: May 16, 2025 at 10:24 PM EDT

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

Magnachip doesn’t pass our quality test. First off, its revenue has declined over the last five years. On top of that, Magnachip’s relatively low ROIC suggests management has struggled to find compelling investment opportunities, and its declining EPS over the last five years makes it a less attractive asset to the public markets.

Magnachip’s forward price-to-sales ratio is 0.8x. The market typically values companies like Magnachip based on their anticipated profits for the next 12 months, but it expects the business to lose money. We also think the upside isn’t great compared to the potential downside here - there are more exciting stocks to buy.

Wall Street analysts have a consensus one-year price target of $6 on the company (compared to the current share price of $4.14).

Although the price target is bullish, readers should exercise caution because analysts tend to be overly optimistic. The firms they work for, often big banks, have relationships with companies that extend into fundraising, M&A advisory, and other rewarding business lines. As a result, they typically hesitate to say bad things for fear they will lose out. We at StockStory do not suffer from such conflicts of interest, so we’ll always tell it like it is.

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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