Photronics: AI Tailwinds & A Cheap Stock

Group 1 - The U.S. GDP grew 3% in Q2 2025, driven by a significant decline in imports after a record surge in Q1 2025, although tariff uncertainty remains a concern [2] - The artificial intelligence (AI) sector continues to attract substantial investments, with companies like Anthropic raising $5 billion, increasing its valuation from $62 billion to $170 billion [3] - Photronics (PLAB) is identified as an undervalued stock benefiting from AI-driven demand for photomasks, with a strong fundamental research backing its investment thesis [4][5] Group 2 - Photronics is positioned to profit from AI-driven growth in photomask demand due to advancements in chip technology, capacity expansions, and consumer electronics [5][6] - The global semiconductor manufacturing capacity is projected to grow at a compounded annual rate of 7% from 2024 to 2028, with semiconductor sales increasing by 20% year-over-year in May 2025 [7] - The long-term outlook for the semiconductor market indicates an 8% compounded annual growth rate from 2025 to 2034, driven by the demand for advanced chipmaking technologies [8][9] Group 3 - Photronics has increased its high-end photomask revenue from 30% in fiscal 2023 to 39% in the first half of fiscal 2025, indicating a shift towards higher-value products [12] - The company operates 11 production facilities globally, which minimizes tariff impacts and allows for efficient collaboration with customers [13][15] - Photronics has demonstrated strong financial performance, with revenue and core earnings growing at compounded annual rates of 6% and 25% since fiscal 2014, respectively [16] Group 4 - The company has generated $415 million in free cash flow from fiscal 2020 to fiscal 2Q25, representing 37% of its enterprise value, which supports its share repurchase program [19] - Photronics has a competitive edge in profitability, with a NOPAT margin of 19% and a return on invested capital (ROIC) of 12% in the trailing twelve months [17][21] - The company has repurchased $77 million in shares in the first half of fiscal 2025, with a potential repurchase yield of 1.8% based on current market capitalization [23] Group 5 - Photronics faces ongoing tariff uncertainty, particularly regarding its revenue from China, which accounted for 27% of its revenue in the first half of fiscal 2025 [24] - The company generated 36% of its revenue from three customers in fiscal 2024, indicating a concentration risk that could impact financial performance [27] - The current stock price implies a permanent decline in profits of 20%, despite the company's historical growth rates in NOPAT [29]