ASE Technology Stock: Underappreciated Semiconductor Play Growing at Reasonable Valuation

Safe & Cheap ASX Stock Pays Dividends

The current environment for semiconductor stocks looks a bit shaky, given the lower demand for microchips, but there are bullish tailwinds on the horizon. This was triggered by significant spending worldwide as countries work to build up their domestic semiconductor manufacturing capacity.

A snapshot of the microchip sector, the SPDR S&P Semiconductor ETF (NYSEARCA:XSD), has been extremely volatile this year, declining by 44% from $250.82 in January to $141.26 in July. Nevertheless, the exchange-traded fund (ETF) has rallied by 33% from its low.

I view the share-price weakness of semiconductor stocks as an opportunity to accumulate shares.

Chart courtesy of StockCharts.com

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While you might be familiar with U.S. microchip companies, the biggest chip manufacturers are in Asia, with Taiwanese foundries leading in terms of innovation.

Taiwan-based ASE Technology Holding Co Ltd (NYSE:ASX) might not be well known to U.S. investors, but ASE Technology stock provides above-average long-term growth potential. The foundry company provides semiconductor manufacturing solutions, including assembly and testing.

Although ASE Technology Holding Co Ltd has solid fundamentals, ASX stock is down by 23% this year and 36% from its 52-week high of $9.40, which was set in August 2021.

ASE Technology stock’s price weakness presents an attractive risk/reward opportunity.

Chart courtesy of StockCharts.com

My Bullish Thesis for ASX Stock

ASE Technology Holding Co Ltd has been delivering consistent financial growth, yet ASE Technology stock has risen by very little. My view is that the fact the company is based in Taiwan has caused the market to undervalue ASX stock.

Consider that ASE Technology Holding Co Ltd has grown its revenues for four consecutive years. Its revenues grew by 110% from $9.8 billion in 2017 to a record $20.6 billion in 2021.

The company’s revenue compound annual growth rate (CAGR) for that period was a healthy 20.4%. That’s high for a company that’s valued at more than $13.0 billion.

Looking ahead, analysts estimate that ASE Technology Holding Co Ltd will deliver revenues of $21.9 billion in full-year 2022, followed by a 4.7% increase to $22.9 billion in 2023. (Source: “ASE Technology Holding Co., Ltd. (ASX),” Yahoo! Finance, last accessed August 25, 2022.)

This is compelling and implies a forward multiple of 0.6 times the company’s consensus 2023 revenue estimate.

Fiscal YearRevenues (Millions)Growth
2017$9.8N/A
2018$12.127.8%
2019$13.811.3%
2020$17.015.4%
2021$20.619.5%

(Source: “ASE Technology Holding Co. Ltd. ADR,” MarketWatch, last accessed August 25, 2022.)

ASE Technology Holding Co Ltd’s rising gross margins led to a five-year high earnings before interest, taxes, depreciation, and amortization (EBITDA) of $4.1 billion in 2021, representing the company’s fourth straight year of EBITDA growth.

Moreover, the company’s EBITDA CAGR of 22.7% during this time frame beat the company’s revenue CAGR.

Fiscal YearEBITDA (Millions)Growth
2017$1.8N/A
2018$2.323.7%
2019$2.46.9%
2020$3.024.5%
2021$4.137.5%

(Source: MarketWatch, op. cit.)

On the bottom line, ASE Technology has been consistently profitable based on generally accepted accounting principles (GAAP) diluted earnings per share (EPS). There was a drop in 2019, but that was followed by two years of stronger GAAP diluted EPS, including a five-year high in 2021.

Adjusting for non-recurring expenses, ASE Technology Holding Co Ltd is expected to report $0.92 per diluted share this year and $0.90 per diluted share in 2023. This translates to an attractive multiple of 6.5 times the company’s consensus EPS estimate for 2023. (Source: Yahoo! Finance, op. cit.)

Fiscal YearGAAP Diluted EPSGrowth
2017$0.18N/A
2018$0.195.6%
2019$0.13-31.6%
2020$0.2269.2%
2021$0.52136.4%

(Source: MarketWatch, op. cit.)

ASE Technology Holding Co Ltd is also a free cash flow machine. The company uses its funds to pay dividends to shareholders and reduce its debt.

Fiscal YearFree Cash Flow (Millions)Growth
2017$765.1N/A
2018$316.5-58.6%
2019$517.563.5%
2020$461.8-10.8%
2021$390.4-15.5%

(Source: MarketWatch, op. cit.)

Analyst Take

In my view, ASE Technology Holding Co Ltd is a well-managed semiconductor foundry company with sound fundamentals and an attractive share price.

While ASX stock looks undervalued, it pays $0.47 per share in dividends annually, for a yield of 7.8%. Investors could collect the dividends and wait for things to improve.