was one of many
suppliers hit by soft iPhone sales last year. The company, once known as
produces 3-D sensors and laser technologies used in smartphones.
The shares (ticker: AMS.Switzerland) have dropped 74% over the past year versus gains of 3.7% for the S&P 500, according to Morningstar data. Both figures include dividends. In February, AMS was forced to cut its first-quarter revenue guidance to $350 million to $390 million, considerably short of the compound annual revenue growth target of 60% for 2016 to 2019 that it reiterated last October. The high end of that estimate ($390 million) is much lower than 2018’s first-quarter revenue of $453 million.
AMS also said its first-quarter operating margin would be in low-single digits, far lower than the 30% company target and down from 17% in the first quarter of 2018.
The big problem is dependence on one customer, Apple (AAPL), which provides about 40% of revenue, according to estimates from Seth Sherwood, an equity analyst at Morningstar.
AMS, however, is actively trying to diversify its revenue streams beyond Apple to focus more on other consumer-goods customers as well as industrial applications such as self-driving automobiles, medicine, and factory operations. The firm says it wants a 40/60 industrial-consumer mix in the long term. That could help reignite interest in the stock, which is valued at $2.4 billion. One example of 3-D’s potential is in augmented-reality equipment to assist surgeons, says Sherwood. “The eye-tracking systems can help you know whether the person is looking in the right place,” he says.
Eventually, that will start showing up in sales.
“We expect AMS’ industrial, medical, and automotive revenue to grow at a midteens average annual pace through 2022,” states a recent report from Morningstar.
Read more: Apple Supplier Stocks Take Another Hit as iPhone Sales Weaken in China
Moving into these markets will hold a number of benefits for AMS beyond diversification. Industrial applications of AMS technology are far stickier than consumer uses such as smartphones. AMS components “won’t immediately be designed out of the product,” as often occurs in the more fickle consumer market, where smartphone makers can easily and quickly switch suppliers, Sherwood says.
The design cycle for automotive/industrial/medical products can take years before it boosts revenue, Sherwood says. For that reason, he says any near-term sales growth will need to show up in consumer growth beyond Apple, such as for use in Android smartphones.
The switch toward the industrial market could also improve profit margins, which will rise from less than 30% in 2018 to 40% by 2022, Morningstar says.
Sherwood says the stock is worth 54 Swiss francs ($54), almost double the recent price.
has a more modest price target of CHF40, which values the stock at 11 times next year’s earnings, or still at a “30% discount to most relevant peers,” which reflects the dependence on Apple.
Dividends should add 1% to 2% a year in the future. AMS suspended its dividend in 2018 “to focus on strengthening its business position in 2019,” as AMS stated in a recent report.
There are substantial risks in buying AMS. Most cutting-edge technology stocks are volatile, so expect a rocky ride. And it will take a while to lessen its reliance on Apple. As
notes, “Near term, we expect that AMS’ share price will be most dependent on the smartphone market.”
However, for those with patience and fortitude, the stock could be a good long-term bet.