Ichor Holdings Stock: Goes For Another Attempt At Breaking Out (NASDAQ:ICHR)

Ichor Holdings (NASDAQ:ICHR), a supplier of fluid delivery subsystems for semiconductor capital equipment, has been kept contained for close to 2.5 years. The stock has been unable to break free of a certain price level, at least on a sustained basis. However, the stock seems to be making another attempt if the price action of the past few days is any indication. Why will be covered next.

ICHR tries again where it has failed before

A previous article from last April took note of the fact that recent quarterly results from ICHR have come in worse than expected, mostly as a result of soft demand for ICHR in the market for semiconductor manufacturing equipment. On the other hand, the outlook calls for a recovery with a strong rebound in demand in the next few years. As a result, the article rated ICHR a hold.

Three months have passed and the stock has not made all that much headway in either direction as shown in the chart above. ICHR went basically sideways by trading within a range in the $36-40 region. The stock had issues getting past $40 or so, suggesting resistance around this price level. On the other hand, the stock did not fall below $36 or so, suggesting the presence of support at this level.

The stock did come close to falling below support at $36 on May 8 when it hit an intraday low of $34.57, but ICHR recovered to end the day at $37.86, well above support. Support has held its ground, but resistance may be failing to do so. Notice how the stock has closed above the $40 level in the past few days. The stock closed at $40.37 on Friday.

The significance of this is that past forays above the $40 level have shown to the difficult. The chart above shows how the $36-40 region has been hard to get by for the last 2.5 years. Notice how many times the stock had to change directions in the $36-40 region. There have been repeated attempts, but after 2.5 years the stock has yet to conclusively demonstrate the $40 hurdle is no longer a problem.

The stock did manage to get past the $36-40 region once in the last 2.5 years and that was earlier this year in February-March. The stock proceeded to rally to hit a 52-weeks high of $46.43 on February 16, but this episode ended like the prior attempts with the stock getting back below the upper bound of $36-40.

The stock has again made it above $40, but it remains to be seen whether the breakout is for real this time or whether the breakout will end up like all the other attempts for the last 2.5 years. Assuming the stock does not fall back below $40, the path could be clear for another repeat of what happened earlier this year. The stock could be heading for another attempt at the 52-weeks high at $46.43. This is close to the current consensus price target of five Wall Street firms, which is $46.60.

Why the stock languished all this time and why the stock could break out for real

As mentioned earlier, the stock came close to falling below support at the lower bound of the $36-40 region on May 8. This is one day after ICHR released its most recent earnings report, a report which missed earnings estimate by a fairly wide margin with a non-GAAP loss of $0.09 per share, or $0.09 worse than expected. The table below shows the numbers for the most recent report.

Click to enlarge

Source: ICHR

In addition to weaker-than-expected earnings, ICHR also suggested demand was not progressing as earlier anticipated. From the Q1 earnings call:

“We’re not really seen as much of an inflection as we would have anticipated yet”

Source: ICHR earnings call

The recent quarterly losses have negatively affected the balance sheet. ICHR has lost $52M or $1.77 per share on a TTM GAAP basis, but ICHR countered this with a $125M share offering to raise capital. As a consequence, ICHR finished Q1 FY2024 with cash and cash equivalents of $102.12M, offset by long-term debt of $131.92M.

ICHR is still expecting demand to rebound

However, while quarterly revenue is expected to remain stable at the $200M level this year, ICHR expects this to ramp up to a $250-300M quarterly run rate sometime in 2025 when industry spending rebounds. This represents an increase in quarterly revenue of 25-50%, a big difference.

“our revenues tend to recover more sharply when industry spending rebounds. Furthermore, our business model and financial profile tend to generate significant operating leverage as revenues grow. Given the current industry expectations for WFE remaining relatively stable at these levels through 2024 in advance of a strong 2025, we also expect our revenue run rate to continue around the $200 million level until the beginning of a revenue ramp. We look forward to ramping revenues back towards the $250 million to $300 million plus level in 2025. We expect to be able to deliver significant earnings growth as revenue volumes increase, which is why we continue to make critical investments in our business in support of future growth.”

Current expectations are based on this outlook. Earnings are expected to remain in a slump in the short term, but they’re expected to jump higher next year. ICHR is expected to release its Q2 FY2024 results in early August and the consensus calls for non-GAAP EPS of $0.03 on revenue of $197.5M, in line with guidance from ICHR as shown below.

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Source: ICHR

ICHR is expected to earn just $0.28 on revenue of $816M in FY2024. In comparison, ICHR earned $0.42 on revenue of $811M in FY2023. However, this is expected to jump to $1.84 on revenue of $1B in FY2025 according to the consensus estimate of Wall Street, thanks to improved demand as suggested in the outlook. The stock closed at $40.37, which implies a P/E ratio of 21.9x with EPS of $1.84, up from a P/E ratio of 144.2x with EPS of $0.28.

What to make of the disparity between ICHR and its customers?

ICHR depends on a small group of customers for sales. In FY2023, Applied Materials (AMAT), Lam Research (LRCX) and ASML (ASML) accounted for 82% of sales. All three have been impacted by the downturn in the market for equipment to some extent, but ICHR appears to have been impacted to a much greater degree than compared to the three customers mentioned.

The other three, for instance, have remained profitable throughout, unlike ICHR. Sales have also not fallen as much as in the case of ICHR, nor have margins deteriorated as much. Some might wonder why ICHR is doing much worse than others during a downturn that is affecting everyone. There are several possible contributing factors, some worse than others.

ICHR supplies subsystems to its customers and those customers may be sitting on inventory that is now being utilized. This could explain why ICHR’s sales have been much worse affected in comparison to its top customers. If this is the main reason for the disparity, then there is not too much to worry about. Once demand recovers, IHCR will likely experience much faster growth once customers start restocking.

However, it’s worth mentioning that there is another possible explanation that is more nefarious. ICHR could be getting squeezed by customers, especially since ICHR does not have many and demand is down. This gives the advantage to the buyer, which could have resulted in ICHR having to offer more favorable terms to its customers.

This could have led to margins getting squeezed, which in turn may have resulted in losses for ICHR. Customers, on the other hand, are reaping the benefits of lower pricing from suppliers like ICHR, which could help them protect their margins and earnings. If this is what is happening to ICHR, and if it continues, then ICHR may have a more serious issue to address.

Investor takeaways

ICHR has been badly affected by the industry downturn that has caused sales and profits to collapse. The stock too has been impacted by having a cap placed on it for the last 2.5 years. However, while ICHR remains in a downturn and quarterly results are expected to remain flat until at least the end of FY2024, the outlook calls for demand to rebound.

This is expected to power earnings higher. The market appears to have given ICHR the benefit of the doubt because the stock has been rallying in anticipation of the recovery, even though recent earnings results came in below expectations and ICHR acknowledged the recovery was not going as earlier anticipated.

This seems to be what is driving the ongoing breakout in the stock out of the $36-40 region, a resistance level that has proven to be difficult to crack for the last 2.5 years. The stock has rallied in anticipation of a strong rebound in the top and the bottom line in 2025, which will multiply earnings several times over.

It may be tempting to be long ICHR with the stock rallying, and the recent move in the stock above $40 is an encouraging sign, but I am neutral on ICHR for now. The stock has indeed rallied and the breakout could be for real this time, but the foundation supporting the rally looks kind of iffy. It is based on the assumption of a big jump in earnings next year, but there is little sign of it right now. On the contrary, the recovery in demand is going slower than expected.

The stock could still fail to break the $36-40 resistance level, especially if the anticipated recovery in demand fails to arrive as anticipated. The outlook is subject to possible revisions. It is possible the downturn could continue well into 2025. Keep in mind it would not be the first time the stock made it past $40, only for the stock to fall back below resistance. What happened before earlier in the year could happen once again this time around.

Bottom line, the case to be long ICHR needs more supporting arguments to back it up. There is arguably not enough of it at the moment. Right now there is only an outlook, but this outlook has been off before. Longs have to bet that ICHR improves as the outlook suggests, because if it does not for whatever reason, the stock could easily repeat what it has already done, which is to give back all it gained.