Kulicke and Soffa Industries Stock: Things Have Changed (NASDAQ:KLIC)

Things could be worse for Kulicke and Soffa Industries (NASDAQ:KLIC). The stock is barely above water with a YTD gain of just 0.25%, but that’s also better than what most stocks have to show for in a difficult year. A number of dynamics are at play, contributing to the current state of affairs. Yet, KLIC is worth holding on to, although patience will be needed as instant gratification is not likely. Why will be covered next.

KLIC paid a price for outperforming

The stock is up 0.25% YTD in 2022. In comparison, the iShares PHLX Semiconductor ETF (SOXX) is down 10.5% YTD. The SPDR S&P500 ETF (SPY) and the Invesco QQQ Trust (QQQ) have lost 4.7% and 9.7% respectively YTD. The year 2022 has been a tough year for most stocks, so for KLIC to outperform and be in positive territory, if only ever so slightly, is a good sign.

However, while some of the outperformance was undoubtedly due to innate strengths, the role of share buybacks needs mentioning. The stock was down substantially for most of 2022, being down 22% as recently as early March, but a rally in the last three weeks or so has erased it all as shown in the chart above. Moreover, the reversal coincided with increased efforts on the part of KLIC to prop up the price of the stock.

KLIC has focused more on buybacks in 2022 than compared to say last year, but things went up a notch in March. For instance, KLIC doubled the size of its share repurchase program to $800M on March 2, followed by an accelerated share repurchase agreement of $150M a week later. KLIC is not new to stock buybacks, but the pace and size of buybacks has drastically increased this year, which the price action suggests had a positive impact on the stock.

On the other hand, buybacks were needed to keep the shorts at bay. Short interest now stands at about 7.65M or roughly 12.6% of the stock float, needing 7.8 days to cover. In comparison, short interest stood at just 0.61M a year ago at the end of March 2021, a difference of more than 7M shares. Short interest was fairly stable for much of 2021, but it rose starting in September, which also happens to be when the stock reached its 52-week high. Short interest has remained elevated since then and the stock has basically gone sideways, despite the ups and down.

Short interest is high, suggesting a significant amount of pessimism directed towards KLIC, but it’s not so high that it cannot easily go higher. What this means is that more shorts could be piling on, driving the stock down in the process. Of course, if this were to happen, short interest would eventually get so high that short sellers would have a hard time covering their position. A short squeeze would likely ensue, catapulting the stock higher. However, such a scenario is still a ways away at this point, assuming it gets that far.

What could embolden the shorts vs. KLIC

There’s a reason why shorts have taken an interest in KLIC. KLIC has shown strong growth in recent quarters, but growth is slowing down for several reasons. For instance, KLIC is facing production constraints and comps have turned against it. The most recent earnings report shows how the numbers are slowing down, something that is likely to continue for a while.

Q1 FY2022 revenue, for instance, increased by 72% YoY to $460.9M, but it declined by 5% QoQ. GAAP EPS increased by 0.5% QoQ and 174% YoY to $2.11 and non-GAAP EPS increased by 0.9% QoQ and 154.7% YoY to $2.19. These numbers don’t look so bad, but they are not up to the level of what KLIC used to do not that long ago.

Keep in mind that without the share repurchases mentioned earlier, earnings per share would be even less. In addition, earnings in Q1 FY2022 got a boost from lower-than-expected operating expenses. Guidance had called for non-GAAP operating expenses of about $77M, but the actual number came in much lower at $65.4M, a difference of $11.6M. The table below shows the numbers for Q1 FY2022.

(GAAP)	Q1 FY2022	Q4 FY2021	Q1 FY2021	QoQ	YoY
Revenue	$460.888M	$485.326M	$267.857M	(5.04%)	72.06%
Gross margin	48.4%	47.7%	45.4%	70bps	300bps
Operating margin	32.8%	31.9%	20.2%	90bps	1260bps
Income from operations	$151.110M	$154.836M	$54.042M	(2.41%)	179.62%
Net income	$133.606M	$133.711M	$48.363M	(0.08%)	176.26%
EPS	$2.11	$2.10	$0.77	0.48%	174.03%
(Non-GAAP)
Operating margin	34.2%	33.0%	22.3%	120bps	1190bps
Income from operations	$157.831M	$160.198M	$59.843M	(1.48%)	163.74%
Net income	$138.819M	$138.266M	$53.690M	0.40%	158.56%
EPS	$2.19	$2.17	$0.86	0.92%	154.65%

Source: KLIC

Guidance calls for Q2 FY2022 revenue of $360M-400M, an increase of 11.7% YoY at the midpoint. The forecast expects non-GAAP EPS of $1.45, plus or minus 10%, an increase of 15.1% YoY at the midpoint. On a sequential basis, revenue and non-GAAP EPS are expected to decline by 17.6% and 33.8% respectively. The latter is quite hefty.

The forecast also sees FY2022 revenue of $1.58B, which is somewhat higher than the $1.5B KLIC had suggested previously. Still, it’s only an increase of 4.1% YoY. In comparison, FY2021 revenue increased by 143.5% YoY. At the same time, KLIC has been fairly conservative with its forecasts. Remember that the forecast got better as FY2021 went by. It’s possible this will happen again in FY2022.

(Non-GAAP)	Q2 FY2022 (guidance)	Q2 FY2021	YoY (midpoint)
Revenue	$360-400M	$340.2M	11.70%
EPS	$1.45 +/- 10%	$1.26	15.08%

The sequential decline is in part due to what happened in the preceding quarters with KLIC stretching production capacity, allowing for revenue levels that were higher than would otherwise be possible. Another reason has to do with operating expenses getting back to normal. As mentioned earlier, operating expenses were lower than they should been in Q1, which boosted earnings, but that’s not going to continue. From the Q1 earnings call:

“As far as OpEx for FY2022, I think as we are guiding $75 million non-GAAP, I think that will continue through the rest of the fiscal year. As to why Q1 was a little bit lower there was some push-out, some R&D projects as well as some SG&A spend. Part of it was because December is the holiday season for a lot of our R&D sites.”

A transcript of the Q1 FY2022 earnings call can be found here.

Non-GAAP EPS hit $2.19 in Q1, but the outlook suggests Q1 is the peak with declining numbers in the rest of the fiscal. There’s also a chance KLIC could undershoot with all the supply chain problems out there. As far as the shorts are concerned, they seem to believe the top is in and it can only be downhill from now on. If the numbers get worse than expected, expect the shorts to double down and drive the stock lower.

What could keep the shorts on a leash

Shrinking earnings could embolden the shorts, but lower valuations could do the opposite. The table below shows the multiples KLIC trades at. For instance, KLIC has an enterprise value of $3B, which is equal to 5.7 times EBITDA on a trailing basis and 6.2 times EBITDA on a forward basis. In general, KLIC trades at much lower multiples than the sector median. However, note that forward multiples are higher than trailing ones, a reflection of earnings expected to decline. On the other hand, if the stock were to be driven down, multiples would also.

	KLIC
Market cap	$3.82B
Enterprise value	$3.05B
Revenue (“ttm”)	$1,710.7M
EBITDA	$531.2M
Trailing P/E	8.54
Forward P/E	9.83
PEG ratio	0.02
P/S	2.20
P/B	3.14
EV/sales	1.78
Trailing EV/EBITDA	5.74
Forward EV/EBITDA	6.20

Source: SeekingAlpha

Investor takeaways

Last September was in many ways a pivotal month for KLIC. KLIC telegraphed what was about to happen at the 2021 Investor Day in September. The turbocharged growth was about to slow down in a hurry. For instance, the outlook was for revenue of $1.5B in both FY2022 and FY2023, not far from the $1.52B FY2021 ended up with. And if there were any doubts out there that a major slowdown was coming, then Q2 guidance should put them to rest.

Revenue grew by 72% YoY and non-GAAP EPS grew by 154.7% YoY in Q1, but the forecast sees both slowing down to 11.7% and 15% respectively in Q2. Sequentially, they are expected to contract by 17.6% and 33.8% respectively. KLIC has tended to be conservative with its forecasts, so it’s possible the numbers could turn out to the better. On the other hand, supply chain disruptions could cause the numbers to come in lower than expected, as has been the case with some of KLIC’s peers in the industry, something that could become even more likely due to recent geopolitical events.

Shorts seem to have gotten their cue from the Investor Day as well. Short interest took off in September and it has remained elevated since then. Whether it’s a coincidence or not, the stock has not been the same since September. The stock was rallying, but it has basically gone sideways since then. The stock peaked in September with a YTD gain of 131%, but it has since lost 17.5% of its value. The stock is up slightly in 2022, which is better than most, but losses would be much greater if KLIC had not accelerated its share buyback program to help stem the bleeding.

I am bullish KLIC, but there’s a high probability bulls will have to be patient as the stock is unlikely to go on a sustained run with the way everything is set up right now as mentioned before in a previous article. The stock is more likely to remain stuck in a trading range for the near future. Shorts seem to have the stock in a tight hold based on recent price action and there’s room for them to tighten their grip. Shorts are unlikely to let go with the quarterly numbers unlikely to improve much in the near term.

If anything, the recent turn of events, like the increased hawkishness on the part of the Federal Reserve and the war in Europe, have likely strengthened the conviction of the shorts by shifting the odds in their favor. The stock will have a difficult time breaking out and eclipsing the September peak, being up against some pretty formidable obstacles, including stagnant growth, heavy short presence, and a macro environment that is not conductive to stocks.

With that said, multiples are low enough to make the stock worth accumulating for a payoff down the road. Growth is shackled right now, but KLIC will eventually return to growth with advanced packaging, display and batteries for electrical vehicles leading the way. The first one could even become the dominant trend in the semiconductor industry.

Bottom line, things have changed for KLIC, especially when it comes to short-term growth prospects. The hypercharged growth is over for now. KLIC has to consolidate its previous gains, which requires time to digest it all. KLIC may not yield much in the short term due to all the headwinds out there, especially with all the shorts out there. If anyone is looking for a quick payoff, then KLIC is more likely than not to disappoint. But if someone is in it for the long haul and is investing in KLIC based on the prevailing industry trends, then long KLIC is worth holding on to.