Semiconductor and AI Stocks: ASE Technology Faces Headwinds While C3.ai Rides AI Hype

ASE Technology Holding: Headwinds Have Gained Strength (NYSE:ASX)

The headwinds giving ASX problems are likely to remain for some time, which means that continued caution is warranted. ASE Technology Holding (NYSE:ASX), the leading provider of outsourced semiconductor assembly and test or OSAT services to the semiconductor industry, could have used some good news on July 25. The stock has been sliding in the past few weeks, and the release of the Q2 FY2024 report on July 25 was a timely opportunity to stem the slide by reaffirming the bull case for ASX with a strong report. However, the latest report failed to deliver the boost the stock could have used. If anything, the Q2 FY2024 report was a letdown in several ways, which included a lowering of expectations for FY2024. Why will be covered next. The stock has fallen off recently A previous article from last April urged caution after the door was opened to the possibility of a downward revision to the FY2024 outlook because demand was not recovering as expected at the start of FY2024 when the outlook was given. Still, ASX made no changes to the FY2024 outlook in the Q1 FY2024 report. ASX was therefore rated a hold with an eye towards possible changes ahead. The chart above shows why the prior rating was not overly cautious. The stock closed at $10.33 when the prior article was published in April, which is higher than where the stock closed three months later on July 29 at $9.96 per ADS to give ASX a market cap of $21.5B. However, it is worth mentioning that while the stock failed to hold on to gains, the stock did advance for much of the past three months. Why the stock could be due for a bounce with potential support getting closer Note the ascending trendline in the chart above. The stock followed this trendline as it rose in May and June until it hit a 52-weeks high of $12.86 on July 11, but it's been downhill from then on. ASX has lost 22.6% of its market cap in the last few weeks and, in doing so, the stock has fallen below the trendline that had supported the rally since it started in November 2023. The drop was almost continuous, although there was an attempt at a bounce at around the $11 price point as can be seen in, for instance, the green candlestick on July 22 against all the red candlesticks during the recent drop. This was unlikely to be a coincidence since it happened close to the aforementioned trendline, Furthermore, the stock was close to a Fibonacci retracement level. Recall how the recent peak of $12.86 was the culmination of a long uptrend that started after the stock bottomed at $4.45 in October 2022, as shown in the chart above. It's therefore worth knowing that the 23.6% Fibonacci retracement of $4.45 to $12.86 is $10.88. This is very close to $11 or the region where the stock went for a mini bounce from July 19 to July 23. But whatever support there was did not hold because the stock resumed the decline on July 24 to close at $9.96 on July 29, reducing once fairly substantial YTD gains to just 5.8%. However, while there is room for the stock to fall further, the stock may be due for another attempted bounce after falling by as much as it has in the last few weeks. ASX, for instance, is now oversold with an RSI value at just under 29. Furthermore, the next Fibonacci retracement level is not far away. The next Fibonacci level to come after 23.6% is 38.2%, which is $9.65 from $4.45 to $12.86. This is just a few percentage points from where the stock is at $9.96. ASX may be able to put together a bounce soon for these reasons, being oversold and close to potential support. What triggered the selloff in ASX It's important to note that ASX was not alone in the recent selloff. For instance, the iShares Semiconductor ETF (SOXX), an ETF which tracks 30 stocks active in the semiconductor space, also peaked on July 11 like ASX, before falling off in recent weeks. The decline in semiconductor stocks like ASX that came in the weeks after July 11 can be attributed to a couple of developments. First, there were reports the U.S. government is considering increasing existing export restrictions to China. This was not well received by the semiconductor sector because it could potentially mean lower sales and earnings. In addition, a candidate seeking to become the next POTUS made several comments about Taiwan, which happens to be where ASX has most of its manufacturing facilities. All of this conspired to take down the semis, ASX included. What caused a further selloff in ASX ASX was dropping prior to the release of the latest report from ASX, but the drop continued after ASX released its Q2 FY2024 report on July 25. The latest numbers themselves were roughly in line with expectations, although they were overshadowed somewhere else. Revenue increased by 3% YoY to NTD140,238M, which converts to $4,351.2M using a USD:NTD exchange rate of 1:32.23. EPS declined by 1% YoY to NTD1.75, which translates to NTD3.50 or $0.11, or 0.109 to be more exact, per ADS. EBITDA was NTD26,127M in Q2 FY2024, up from NTD25,770M in Q2 FY2023. Note that the first fiscal quarter tends to be down due to seasonality, which helps explain the strong QoQ changes in Q2 FY2024 ASX ended Q2 FY2024 with cash, cash equivalents and current financial assets of NTD75,335M or $2,337.4M on the balance sheet. On the other hand, ASX has more debt to service with interest-bearing debt totaling NTD183,938M or $5,707M. The current ratio is 1.17. The table below shows the numbers for Q2 FY2024. (Unit: NTD M, except EPS) (IFRS) Q2 FY2024 Q1 FY2024 Q2 FY2023 QoQ YoY Revenue 140,238 132,803 136,275 6% 3% Gross margin 16.4% 15.7% 16.0% 70bps 40bps Operating margin 6.4% 5.7% 6.9% 70bps (50bps) Operating income 9,021 7,525 9,412 20% (4%) Net income attributable to shareholders 7,783 5,682 7,740 37% 1% EPS (diluted) 1.75 1.28 1.76 37% (1%) Click to enlarge Source: ASX However, the stock did not sell off for no reason in the wake of the Q2 report. While some market segments, particularly those tied to AI demand, are doing very well, most end markets are not where they ought to be. ASX made no changes to the FY2024 outlook previously given, but in a roundabout way suggested FY2024 revenue could come in lower than previously expected as a result of the recovery in demand going slower than expected. From the Q2 earnings call: "I guess the full year -- in terms of a full year perspective, I think the -- in the general market, the recovery seems to be a bit slower than we were expecting. So in the -- although in the second half, we'll start to see the -- general market start to bottom out, and we'll start to have some recovery -- more recovery there. But the pace of it seems to be slower than it originally expected. But on the leading edge, we are still is booming, but we are aggressively trying to catch up with the capacity to meet the growing demand. Well, all in all, put everything into consideration, I think for the full year, we're now looking at a more moderate type of growth in terms of our top line. And in terms of margin, I think, again, because of the more muted recovery of the general market, I think the -- in third quarter, we will come in a little bit short" Source: ASX earnings transcript Management further stated: "For the traditional business, the second quarter had selective products with signs of reemergence. But by and large, general product demand lacked the strength and durability necessary to be considered a sustained healthy pickup in the immediate term." The stock has fallen each day since these comments from ASX. What a lowering of expectations could mean for FY2024 Remember that ASX called for FY2024 revenue to grow in the 6-10% range YoY at the start of the year. ASX seems to be prepping for a FY2024 that comes in at the lower end of the range. Furthermore, ASX has its work cut out because even that target will not come easy. H1 FY2024 revenue, for instance, came in at NTD273,041M, an increase of just 2.2% YoY, which is well below the 6-10% range aimed for. Yes, H2 is usually stronger due to seasonality, but ASX will have to come from behind to achieve even the lower end of expectations. The previous article estimated FY2024 EPADS could come in at $0.65-0.70, but something like $0.55 might be more fitting in light of weaker-than-expected demand and assuming there is not a huge change in demand in H2. This would translate to a P/E ratio of 18.2x, with the stock at $9.96. In comparison, the 5-year average is about 13x. Q3 FY2024 guidance calls for ATM revenue to increase in the high single digits and for EMS revenue to increase in the mid-to-high single digits, both QoQ. This might be enough for ASX to earn an estimated $0.16-0.18 per ADS, although foreign currency rate changes could affect the final number. Investor takeaways The last few weeks have seen a massive change for ASX in a number of areas. There were some headwinds before, which included demand that was weaker than expected, but the stock was able to look past them to continue to march higher, building on the uptrend that can be traced all the way back to October 2022. However, the stock has lost almost all its gains for the year in the last few weeks, with headwinds picking up strength. Semis were negatively affected by reports of new export restrictions and geopolitical tensions, especially involving Taiwan, where ASX is located. Furthermore, the Q2 FY2024 report provided no relief after demand continued to come in below expectations. While ASX did not change the prior outlook for FY2024, which calls for growth of 6-10% YoY, it did suggest the higher end of the range is probably unrealistic in light of how the year has gone thus far. Revenue grew by just 2.2% YoY at the midpoint of FY2024. ASX will need to step it up, and that is just to hit the low end of the FY2024 outlook. FY2024 is shaping up to be just a small improvement over FY2023, a year ASX earned NTD7.18, or $0.46 per ADS, on revenue of NTD581,914M or about $18.7B. In comparison, ASX earned NTD3.03, or $0.19 per ADS, on revenue of NTD273,041M or $8.47B in the first two quarters of FY2024. The second half of the year is usually better, but it is not unreasonable to say the odds ASX might have to revise downwards its FY2024 outlook has risen in light of the recent Q2 FY2024 report. I continue to hold ASX, but I see no reason to be a buyer of ASX at this time. The risks are high. The stock is currently in the midst of a major selloff that has already wiped out almost a quarter of its value in less than three weeks from its peak. It is possible the stock might soon make an attempt at a bounce since it is oversold after dropping as much as it has recently and with a potential support level coming up. Nonetheless, the recent headwinds that have given ASX so much problems are likely to be around for a while. Geopolitical tensions are unlikely to go away soon. So too are export restrictions on the semiconductor industry, and they could very well increase even further. While there are some pockets of strength, particularly demand tied to AI, overall demand is not strong enough to warrant being very bullish on ASX at this time. All this is likely to weigh on the stock for the time being. Bottom line, the recent developments have validated the conclusions drawn in the prior article. The short-term outlook for ASX is such that taking a cautious approach is warranted. Keep in mind, the stock moved higher from October 2022 to July 2024. That is quite a bit of time, and some correction is arguably needed after the move ASX made prior. This is what seems to be happening right now. Patience will be needed as it may take a while to play out. Welcome to my author's site. As an avid follower of SeekingAlpha, I take great interest in articles posted as the subject matter is often something that appeals to me. However, I will sometimes encounter an article that I might not agree with. My purpose is to present an alternative view to readers that they may want to take into account. I hope you find my articles interesting and informative. Analyst's Disclosure: I/we have a beneficial long position in the shares of ASX either through stock ownership, options, or other derivatives. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article. Seeking Alpha's Disclosure: Past performance is no guarantee of future results. No recommendation or advice is being given as to whether any investment is suitable for a particular investor. Any views or opinions expressed above may not reflect those of Seeking Alpha as a whole. Seeking Alpha is not a licensed securities dealer, broker or US investment adviser or investment bank. Our analysts are third party authors that include both professional investors and individual investors who may not be licensed or certified by any institute or regulatory body.

C3.ai: AI Hangover Hasn't Crashed The Stock (NYSE:AI)

Looking for a helping hand in the market? Members of Ultimate Growth Investing get exclusive ideas and guidance to navigate any climate. Learn More " C3: Software Stocks Under Pressure C3.ai, Inc. (NYSE:AI) investors have endured a challenging few months, even as the enterprise AI company's stock recovered remarkably from its April 2024 lows. SaaS stocks came under pressure in May 2024 following Salesforce's (CRM) disappointing release. However, investors were buoyant after C3's earnings release in late May 2024. As a reminder, AI posted a solid quarter, outperforming Wall Street estimates and bucking the trend observed in other enterprise SaaS stocks. In my previous bullish C3 article in May, I argued that the stock had already bottomed. That thesis has remained intact, although the market's skepticism about the stock has not improved markedly. As a result, investors are likely still concerned with its execution risks as it transitions its business model. However, AI and other SaaS peers in the iShares Expanded Tech-Software Sector ETF (IGV) have been under pressure since early July 2024. The market rotated from previous AI winners, hitting software and semiconductor stocks, as investors reallocated to small caps. Notwithstanding the rotation, buying momentum in AI has remained resilient, even though a lack of follow-through has troubled a further rally in AI ("C" momentum grade). C3: Acceleration In Revenue Growth Justifies Its Business Model C3 stock posted a 1Y total return of -34%, underscoring the inherent volatility in picking unprofitable stocks like AI ("D" profitability grade). Despite that, the company recorded an acceleration in revenue growth, highlighting a relatively successful transition to consumption-based pricing. It also posted 191 new agreements for FY2024, up 52% YoY. Pilot programs also picked up pace, as the company closed 34 pilots in FQ4. Management highlighted that C3 had accumulated 172 pilots, with "157 still active" at the end of FQ4. Therefore, I believe it should help improve execution visibility moving ahead, although there's no guarantee of revenue conversion. C3's Bookings Diversity Suggest Broad AI Adoption Notably, C3 has diversified its pilots across 19 different industries. Consequently, it underscores the scalability and adaptability of its AI models and applications. The AI enterprise company also has significant exposure in Federal, Defense, and Aerospace, which accounted for 50% of bookings. I assess that C3's ability to generate such remarkable performance from this vertical underscores the robustness and credibility of its platform. It should also benefit the company as the US engages in an "AI arms race" with its main geopolitical rivals. As a result, I assess that while C3 must still justify its ability to turn profitable, investor sentiments on its growth prospects are expected to remain optimistic. As seen above, C3's profitability is expected to improve further as it scales, potentially reaching adjusted EBITDA profitability by FY2027. Therefore, the company must demonstrate a robust conversion from its pilot programs, validating its go-to-market in a highly competitive enterprise AI field. CEO Tom Siebel communicated in a June conference on the need for C3 to "balance" between growth and profitability. Despite that, management is cognizant that raising additional capital in the current market conditions may not be favorable. Therefore, C3 must manage its net cash balance sheet well ($750M in cash and equivalents in FQ4) until it reaches sustainable profitability. C3 Stock: Weak Profitability A Major Headwind As seen above, AI is rated with a "C+" valuation grade. However, its relatively weak metrics across the five rated factors underscore the challenge of maintaining a consistently bullish thesis. I assess that the $1T AI CapEx tailwinds are expected to benefit and drive significant opportunities for AI infrastructure companies. However, there could be a digestion period before enterprise AI companies like C3 can benefit markedly. Hence, the risks of being over-optimistic on its bullish thesis cannot be overstated. Moreover, leading SaaS companies like Salesforce can invest aggressively to integrate enterprise AI into their models, expanding their offerings. ServiceNow's (NOW) recent earnings performance corroborates my conviction that pure-play enterprise AI stocks like C3 might come under pressure if AI adoption isn't as fast as anticipated. There are also concerns about whether the Generative AI gold rush was overhyped. As a result, it could introduce higher execution risks for unprofitable companies like C3 as they deal with potentially reduced Generative AI spending by end customers. Is AI Stock A Buy, Sell, Or Hold? AI's price chart shows mixed signals, even though I assess that its April 2024 lows ($20 level) should hold robustly. However, buying sentiments have not been remarkable, corroborated by the stock's "C" momentum grade. In other words, the market seems to be taking a "wait and see" approach, suggesting the need for management to execute well. I've also determined that AI's $33 level could be a critical resistance zone. Buyers have also failed to muster sufficient momentum to break decisively above the $40 level, weakening the bullish case in C3 stock. C3's bullish case is predicated on its ability to continue executing its growth cadence through FY2027. However, pessimism seems to have been baked into its relatively reasonable valuation ("C" valuation grade). Therefore, unless management guides to a worse-than-anticipated outlook, bullish industry tailwinds and the AI growth surge should help bolster investor sentiments. As a result, maintaining a bullish rating on AI is assessed to be apt, although care must be taken to manage exposure accordingly. Rating: Maintain Buy. Important note: Investors are reminded to do their due diligence and not rely on the information provided as financial advice. Consider this article as supplementing your required research. Please always apply independent thinking. Note that the rating is not intended to time a specific entry/exit at the point of writing unless otherwise specified. I Want To Hear From You Have constructive commentary to improve our thesis? Spotted a critical gap in our view? Saw something important that we didn't? Agree or disagree? Comment below with the aim of helping everyone in the community to learn better! A Unique Price Action-based Growth Investing Service We believe price action is a leading indicator. We called the TSLA top in late 2021.We then picked TSLA's bottom in December 2022.We updated members that the NASDAQ had long-term bearish price action signals in November 2021.We told members that the S&P 500 likely bottomed in October 2022.Members navigated the turning points of the market confidently in our service.Members tuned out the noise in the financial media and focused on what really matters: Price Action. Sign up now for a Risk-Free 14-Day free trial! JR Research is an opportunistic investor. He was recognized by TipRanks as a Top Analyst. He was also recognized by Seeking Alpha as a "Top Analyst To Follow" for Technology, Software, and Internet, as well as for Growth and GARP. He identifies attractive risk/reward opportunities supported by robust price action to potentially generate alpha well above the S&P 500. He has also demonstrated outperformance with his picks. He focuses on identifying growth investing opportunities that present the most attractive risk/reward upside potential. His approach combines sharp price action analysis with fundamentals investing. He tends to avoid overhyped and overvalued stocks while capitalizing on battered stocks with significant upside recovery possibilities. He runs the investing group Ultimate Growth Investing which specializes in identifying high-potential opportunities across various sectors. He focuses on ideas that has strong growth potential and well-beaten contrarian plays, with an 18 to 24 month outlook for the thesis to play out. The group is designed for investors seeking to capitalize on growth stocks with robust fundamentals, buying momentum, and turnaround plays at highly attractive valuations. Learn more Analyst's Disclosure: I/we have a beneficial long position in the shares of NOW, IGV, CRM either through stock ownership, options, or other derivatives. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article. Seeking Alpha's Disclosure: Past performance is no guarantee of future results. No recommendation or advice is being given as to whether any investment is suitable for a particular investor. Any views or opinions expressed above may not reflect those of Seeking Alpha as a whole. Seeking Alpha is not a licensed securities dealer, broker or US investment adviser or investment bank. Our analysts are third party authors that include both professional investors and individual investors who may not be licensed or certified by any institute or regulatory body.