Shares of Camtek (NASDAQ:CAMT) have been setting fresh highs. In February, I last inspected the semi inspection play, which has been benefiting from strong momentum in terms of new orders.
These orders did not show up yet in the 2023 sales results, but should translate into real growth in 2024, with investors anxiously awaiting more clues about the guidance. As it turns out, orders are now really translating into sales growth, adding greater momentum to the stock, too much if you ask me.
Camtek - A Hidden Gem In Semi Land
Camtek is a developer and manufacturer of high-end inspection and metrology equipment, used in the semiconductor industry. These devices inspect and measure wafers during various stages of the production process.
More specific subsegments and products include patterned wafer inspection & metrology, wafer process controls, interconnect inspection & metrology, and chiplet modules inspection & metrology.
The company surfaced on my radar as it posted a near 20% increase in sales in 2022 to $321 million, which growth standing out versus the wider sector. The company was very profitable, posting GAAP operating profits equal to $81 million, for margins equal to 25%.
With shares trading at just $24 at the time, the company was valued at just $1.15 billion, and at just $700 million if we factor in net cash holdings. This looked like a dirt cheap valuation, and frankly it was.
Shares rallied to the $50 mark over the summer of 2023, not because revenues were increasing; in fact, sales slipped a bit. Momentum was driven by a range of orders, all tied to AI, gaming and datacenters. Being a bit late to the party, and having initiated a small stake around those levels, I was leaning a bit cautious at $80 in February of this year.
At the time I was performing a balancing act as the company has just guided for fourth quarter sales around $87-$89 million, yet that included about $6 million in sales from a smaller acquisition, with organic growth being modest, despite many and large orders being announced. The lack of clarity on the size of the backlog or value of these orders did not withhold the stock from gaining continued ground.
Trading at $80, after shares tripled during 2023, the company commanded a $3.4 billion operating asset valuation, equal to about 10 times sales with multiples coming in their thirties based on the unleveraged earnings potential.
Momentum Run Again
Having traded around the $80 mark through April, shares have seen a huge rally to current highs of $130 in recent weeks and months. In February, the company posted fourth quarter sales to be up 8% to $88.7 million. GAAP earnings came in at nearly $21 million, with adjusted earnings coming in at nearly $28 million.
For the year, full year sales were still down nearly 2% to $315 million, but the conversion of all these orders in 2023, with orders for nearly 300 systems in the second half of the year alone, would drive growth in 2024. First quarter sales were expected to increase by 30% to $93-$95 million, which frankly looks decent.
In May, the company posted first quarter sales of $97 million, up 34% on the year before, and exceeding the already upbeat guidance. Earnings came in at $25 million on a GAAP basis, or nearly $31 million on an adjusted basis. The commentary was very upbeat, with the company seeing second quarter sales up 37% to $100-$102 million, with sequential growth seen in the third and fourth quarter.
Net cash holdings of $466 million are equal to nearly $10 per share based on a diluted share count of 49 million shares (on a diluted basis). Earnings still trend around $2 per share (even including some net interest income) which makes that an $80 stock in February traded at demanding valuations, let alone a current share price of $130 per share. Right here, the operating asset valuation is seen around $6.0 billion, equal to 15 times annualized sales.
What Now?
The truth is that expectations have seen runaway momentum, as shares essentially tripled over the past 18 months, even though the higher order intake from 2023 is now translating into convincing topline sales growth as well.
This momentum run made that I sold out of my final position around the $100 mark, only to see shares rise another 30% in the last couple of weeks. All this momentum is driven by the role of Camtek within AI. For this end, it, among other, supplies so-called HBMs, which is short for high-bandwidth memory chips, used near server GPUs in order to maximize performance.
For me, it is clear that shares of Camtek are in some kind of momentum run, which is taking the stock too far. While strong demand for HBMs is elevating the performance, now making up about 60% of sales in the first quarter, it is clear that most of the share price action has been the result of higher expectations rather than higher earnings. This leaves investors vulnerable for potentially a setback, as current earnings power translates into rather demanding earnings multiple.
Given all this, I find it very easy to pass on the shares here and while I am intrigued about the growth story and learn more about the backlog, I am requiring a pullback to double-digit territory to get interested again. The latest momentum run, coming on top of a very strong period, already caught some somewhat surprised.