How ChipMOS Stock Has a Road to Higher Gains

How ChipMOS Stock Has a Road to Higher Gains
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ChipMOS Technologies Inc: This Contrarian Small-Cap Stock Could Return Big Profits

The tech-heavy Nasdaq is off 3.3% from its high on April 29 on the U.S.-China trade risk, but for patient investors, the long-term outlook for technology stocks will continue to be bullish.

The key to investing in tech stocks is finding companies with good technologies. An intriguing small-cap semiconductor play that could return some strong longer-term gains is Taiwan-based ChipMOS Technologies Inc (NASDAQ:IMOS).

IMOS stock is down 1.2% this year and down 18.9% over the past year as the long-time provider of semiconductor assembly and testing services tries to turn things around.

The company’s solutions are used by semiconductor makers in the manufacturing process. It has global operations in its home base of Taiwan, along with facilities in Singapore, the United States, Korea, Japan, Hong Kong, and others.

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For IMOS stock to move higher, the company needs to deliver better and more consistent results.

ChipMOS stock is not well known, trading at a three-month daily average of 28,690 shares. On its chart, IMOS stock has come off its 52-week high of $18.99 and is currently hovering in a tight sideways channel bound by $15.25 and $18.50.

Chart courtesy of StockCharts.com

If ChipMOS stock can hold its 50-day moving average, and if market sentiment improves, it can easily recover $20.00 and move toward its record $24.14 in 2017, a potential return of 44%.

My Bull Case for IMOS Stock

ChipMOS reports its financials s in the New Taiwan dollar (NT$). As of May 10, US$1.00 equates to around NT$31.00. For my analysis, I will present the company’s 2018 results in U.S. dollars and its historical results based on the percentage change.

The company’s revenue drifted lower from 2015 to 2017, prior to increasing to roughly $596.0 million in 2018.

Fiscal Year Revenue Growth
2015 -9.7%
2016 -7.5%
2017 -2.4%
2018 3.0%

(Source: “ChipMOS Technologies Inc. ADR,” MarketWatch, last accessed May 10, 2019.)

For 2019, the company is estimated to ramp up its revenue by as much as 8.5% to $672.8 million. (Source: “ChipMOS TECHNOLOGIES INC. (IMOS),” Yahoo! Finance, last accessed May 10, 2019.)

The company generates positive earnings before interest, taxes, depreciation, and amortization (EBITDA) but recorded sequential declines from 2015 to 2017. An encouraging sign is that ChipMOS increased its EBITDA to around $172.0 million in 2018.

Fiscal Year EBITDA Growth
2015 -16.3%
2016 -13.2%
2017 -8.5%
2018 19.9%

(Source: MarketWatch, op cit.)

ChipMOS is profitable on both a generally accepted accounting principles (GAAP) and adjusted basis.

Its GAAP earnings surged 148.2% in 2018. Estimates call for the company to report an adjusted $1.92 per diluted share in 2019, for an attractive price-earnings multiple of 8.8 times. (Source: Ibid.)

The company produced positive free cash flow (FCF) in 2014, 2015, and 2017, but negative FCF in 2016 and 2018.

Analyst Take

ChipMOS Technologies Inc should be viewed as a contrarian investment. The company needs to deliver stronger financial results to attract investors.

I recommend patience, but if the company can deliver on its estimates, its valuation would be attractive and bullish for IMOS stock.