Slow Progress At Advanced Energy Industries, But The Worst Is Likely Over

Core Viewpoint - Advanced Energy Industries (AEIS) is expected to experience a low point in Q1'24, with a gradual recovery anticipated in the semiconductor market by 2025, while facing challenges in the near term due to destocking in key segments like Industrial [2][3] Financial Performance - AEIS reported a 12% year-over-year decline in revenue but achieved a sequential growth of 11% in the latest quarter, slightly beating expectations [3] - The Semiconductor segment saw a 9% year-over-year increase and a 5% quarter-over-quarter increase, outperforming expectations by approximately 3% [3] - The Industrial segment faced significant challenges, with revenue down 38% year-over-year and 5% quarter-over-quarter, missing expectations by around 5% [3] - Data Center revenue rebounded strongly, up 24% year-over-year and 74% quarter-over-quarter, exceeding expectations by more than 10% [3] - Gross margin improved to 35.3% (non-GAAP), beating expectations by about 30 basis points [4] - Operating income declined 31% year-over-year but rebounded 57% quarter-over-quarter, beating expectations by 23% [4] Management Guidance - Management's guidance for Q3'24 indicates only a modest sequential revenue improvement of about 1%, which is below market expectations [5] - EPS guidance for Q3'24 is set at a midpoint of $0.90, slightly above prior estimates, but with a wide range of uncertainty reflecting concerns about volumes and product mix [5] Market Outlook - The Semiconductor business is expected to recover as capacity growth picks up next year, with potential for double-digit growth starting in 2025 [6] - The Industrial segment presents long-term opportunities, but management's execution remains a concern, particularly in developing competitive products [6] - Data Center demand is robust, but AEIS needs to demonstrate its ability to compete effectively against established suppliers [6] Long-term Projections - Revenue growth expectations for FY'24 and FY'25 have been adjusted downward, with a projected 17% revenue increase in FY'25 [7] - Long-term annualized revenue growth is anticipated to be between 5% and 6%, with improvements in gross and operating margins expected over the next two years [7] - A fair value estimate for AEIS shares is projected in the range of $110-$120, with potential for higher valuations if recovery trends materialize [7] Conclusion - Confidence in AEIS's future performance hinges on the recovery of the semiconductor equipment market, sustained data center capex, and a rebound in industrial demand, alongside management's ability to execute effectively [8]