A Small-Cap Wakes Up After a Lengthy Slumber
Here's how I would play the latest pop in a former portfolio name.
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Today, thanks to a request of a former Stocks Under $10 subscriber, we'll take a look at former portfolio holding AXT Inc. AXTI. The stock has awoken of late after a lengthy slumber.
For those who have never heard of AXT, the company describes itself as a materials science company that develops and produces compound and single element substrates (wafers) for the semiconductor and telecom industries.
AXT runs two primary product lines. The first is specialty material substrates that combine indium with phosphorus or gallium with arsenic. These materials are used to create opto-electronic products such as light emitting diodes that backlight mobile devices and liquid crystal display televisions as well as automotive panels.
The second product line is the single element substrates manufactured from germanium. This line produces material used in solar cells for both space and terrestrial photovoltaic applications. The firm is headquartered in Fremont, California.
Earnings
On the evening of February 23, AXT released its fourth-quarter financial results. The stock popped overnight into the morning of the 23rd and has since held most of those gains.
For the three-month period ending December 31, AXT posted an adjusted loss per share of $0.07 (GAAP loss: $0.09) on revenue of $20.43M. While neither of these results seems like much to brag about and while the revenue print was "good enough" for a year-over-year contraction of 23.8%, these top and bottom-line numbers both beat Wall Street expectations.
As revenue was contracting 23.8%, the cost of revenue decreased 13.2% to $15.802M. This left gross profit of $4.627M (-46.2%) on a gross margin of 22.6%, down from 32.1% for the year-ago comp, but up from 10.7% sequentially. When adjusted, gross margin printed at 23.2%.
Total operating expenses decreased 14.7% to $8.187M, leaving operating loss at $3.56M, down from the year-ago comp of -$1.001M. After accounting for interest and taxes, net loss/income attributable to shareholders decreased from +$1.341M a year ago to -$3.621M for the period reported. This is how we end up at GAAP loss of $0.09 per share, which was down from a profit of $0.03.
The Catalyst
Why the stock was up after what looks like a poor quarter and to be frank, a poor year?
The call went well. It's that simple. On the call, CFO Gary Fischer said, "Beyond the near term, we remain confident that we can get back to the mid-30% range (gross margin) as the environment strengthens through higher overall volume, more favorable product mix and the benefits of our recycling programs, along with continued efficiency improvements throughout our business."
From that point, CEO Morris Young took over, "We're seeing new demand for HBT applications, where we historically have had very little market share. We believe this is the result of both improving market conditions and the desire among customers to diversify their supply base. We're also seeing improving demand geographically in China across a variety of applications, including LEDs, wireless switches and high-power lasers."
Then it was back to the CFO for some guidance, "In keeping with our comments today, we expect Q1 revenue to be between $20 million and $22 million. We expect our non-GAAP net loss will be in the range of $0.06 to $0.08, and GAAP net loss will be in the range of $0.08 to $0.10."
The guidance really wasn't all that strong. The sales and profitability expectations were in-line with Wall Street, but far worse had been feared. At least the business seems to have found a bottom.
Fundamentals
AXT is yet to file a Form 10-Q for the quarter ended December 31 that includes a statement of cash flows, so we'll be unable to determine operating and free cash flows or lack thereof. That said, we do have a balance sheet, so we'll have to start there.
The company ended the period with a cash position of $52.254M, including short-term investments and restricted cash. Inventories landed at $86.503M, leaving current assets at $170.656M. Current liabilities add up to $81.557M, including $52.921M in short-term debt.
While the current ratio is a strong looking 2.09, and even without inventories, the quick ratio comes to a still decent 1.03, that short-term debt number is quite a chunk and a lot of that will have to be rolled over this year at elevated interest rates.
Total assets amount to $358.701M. This includes no value for intangible assets, which we appreciate. Total liabilities less equity comes to just $89.555B. This balance sheet would not be in bad shape if not for that short-term debt. How inexpensively this firm can turn that short-term debt into long-term debt is going to matter.
My Thoughts?
I got the portfolio out of AXT for a reason. If I were still managing anything with this name in it, I would use this recent upward spike as a reason to reduce my long-side exposure. I could be wrong. Maybe there is something I don't see, but I would not add or initiate on this pop.
(Please note that due to factors including low market capitalization and/or insufficient public float, we consider AXTI to be a small-cap stock. You should be aware that such stocks are subject to more risk than stocks of larger companies, including greater volatility, lower liquidity and less publicly available information, and that postings such as this one can have an effect on their stock prices.)
At the time of publication, Stephen Guilfoyle had no position in the securities mentioned.
