ASE Technology shares are against resistance (NYSE:ASX)

IC falls out of packing tube

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ASE Technology Holding Co., Ltd. (New York Stock Exchange:ASX) was on a roll in recent weeks, but the rally seems to have stalled in the last week or so. The value of the share has appreciated by a third after the rise, but the the charts suggest that resistance is on the way, making further gains difficult, but not impossible. It also opens up the possibility of a pullback, especially since stocks have gained as much as they have in recent weeks. Still, ASX is worth holding, even if it may be due to some hiccups in the near term. Why will be covered below.

The resistance is blocking the higher path

The chart below shows how the stock has struggled in 2022, similar to other semis, though it has fared better recently. Note how the ASX seemed to have a double bottom, which is seen as a bullish sign. The stock bounced in the $5 region at the end of September after doing the same in early July. However, the US government imposed new export rules in early October targeting China, triggering a sell-off in the semiconductor sector. ASX became the leading provider of OSAT services for the semiconductor market.

ASX chart

Source: finviz.com

Shares fell to new year lows on Oct. 11, closing the day at $4.61, but have since seen quite a rally, resulting in the ASX gaining 38% in value in about a month. Notice how the stock was able to break above the downtrend line on a second try. This helped cut YTD losses to 19%. By comparison, most semis have fared worse.

For example, the iShares PHLX Semiconductor ETF (SOXX) has lost 31% YTD, and there are many semiconductor names with much larger losses over the year. The year 2022 has been a tough year for semiconductor stocks, but it’s worth noting how ASX nonetheless managed to come out on top in a tough environment.

Still, it is worth mentioning that the rally in ASX shares has stalled in recent days. The stock appears to be having trouble moving beyond the $6.00-6.50 region, having spent most of the past week stuck in this region. It looks like resistance in the $6.00-6.50 region is getting in the way of the action, which would not be all that unprecedented as the stock has topped in this exact region before.

Note how the stock experienced a rally in July after bottoming out, which peaked in the $6.00-6.50 region with the stock unable to break what appears to be strong resistance. It’s also worth mentioning that the same $6.00-6.50 region used to provide support for stocks earlier in the year. Watch as the stock bounced several times in the $6.00-6.50 region until it broke support in June.

It is said that what used to be support tends to become resistance after a breakthrough and vice versa. This seems to be what has happened. It also suggests that while it is not impossible to break resistance, it will not be easy for the stock to break through resistance in the $6.00-6.50 region. It took a lot of effort for the ASX to break through the $6.00-6.50 region on the way down. It will almost certainly take a lot of effort to break it on the way up.

Why Stocks May Find It Hard To Continue Rising In The Short Term

The stock is likely to face a pullback with resistance on the way and the stock has gained as much as it has in recent weeks. In addition, it is also worth mentioning that after a long period of rising demand, which helped ASX grow in both top and bottom results, ASX is now facing a short-term drop in demand.

A growing number of high-profile semiconductor names like AMD (AMD) and Texas Instruments (TXN) have suggested that demand for semiconductors is waning. The most recent ASX earnings report seems to bear this out if the outlook is any indication. Still, ASX managed to beat expectations for the top and bottom in Q3.

Third-quarter revenue increased 25% year-on-year to NTD 188.626 million, which is equivalent to USD 6.26 billion using an exchange rate of 1:30.1 per US dollar. Earnings per share rose 23% year-on-year to NTD3.92, which translates to $0.26 per ADS. EBITDA was NTD 38.601 million in the third quarter of fiscal year 2022, up from NTD 32.655 million in the third quarter of fiscal year 2021. Note that ASX divested some of its facilities in China at end of 2021.

On a pro forma basis, which excludes contributions from assets disposed of in the third quarter of fiscal 2021, revenue increased 31% year-over-year and earnings per share increased 31% year-over-year. Total interest-bearing debt was NTD224B or $7.44B, partially offset by NTD62B or $2.06B in cash, cash equivalents and current financial assets. The current ratio is 1.22. The following table shows the numbers for the third quarter of fiscal year 2022.

(Unit: NTD M, except EPS)

Q3FY2022

Q2 FY2022

Q3FY2021

quarterly

YoY

Income

188,626

160,439

150,665

18%

25%

Gross margin

20.1%

21.4%

20.4%

(130bps)

(30bps)

Operating margin

12.6%

12.8%

12.2%

(20bps)

40bps

operating income

23,683

20,606

18,426

fifteen%

29%

Net profit attributable to shareholders

17,465

15,988

14,176

9%

23%

EPS

3.92

3.61

3.20

9%

23%

Source: ASX

However, while third quarter quarterly results remained strong, the outlook calls for a substantial slowdown in growth. Demand is weakening for a variety of reasons. From the third quarter earnings call:

“For the fourth quarter, we see a generally softer environment. There will be some products that will remain relatively strong, but problems with potential recessions and anti-inflationary policies appear to be holding back overall demand. Even looking beyond the fourth quarter, our customer forecasts also experience an additional level of volatility as customers balance inventory reduction with product demand. Despite being adjusted downward, the expected movements are balanced, very controlled. We see this environment continue to extend into the first half of 2023.”

Additionally, while it may be too soon to say for sure, management believes that fiscal 2023 is shaping up to be flat in terms of growth.

“I think we are no different from anyone in the industry in that we face the same uncertainties in front of us. And our best estimate for the year is that we should be looking at a flat year. And given our position, we are confident that we will outperform the industry as a whole and outperform our competitors as well.

Going into the first quarter, I think — I think the same pattern continues that automotive and network will continue to perform stronger than other sectors. And I think the industry’s inventory digestion will continue into the first half of next year. And also the new restrictions imposed by the US, that remains to be seen. So there are a lot of moving parts in front of us and we will be closely monitoring the situation.”

By comparison, revenue grew 30.4% year-over-year and EPS grew 49.4% year-over-year in the first three quarters of fiscal 2022, both on a pro forma basis. By next year, both could be at zero.

Why some may want to stay with ASX for the long term

The flat growth is a step down from previous years, but it would also be better than what many semis are likely to achieve next year. ASX could outperform, especially if there is greater acceptance of advanced packaging in the industry, which is not all that different from what ASX has done this year. Flat growth would also make it likely that the ASX will maintain its dividend of $0.47, which translates to a 7.4% yield.

Note that ASX has gained $0.71 in Q1 and Q3 and is projected to gain $0.91 in fiscal 2022 by the end of the year. If ASX earns a similar amount in fiscal 2023 as it did in fiscal 2022, or something close to it, then a dividend of $0.47 looks achievable in 2023, unless earnings fall more than expected and ASX has to cut back. the dividend accordingly.

ASX

market cap

$13.08 billion

company value

$18.46 billion

Income (“ttm”)

$21,131.5M

EBITDA

$4,282.7M

Final GAAP P/E

5.61

Forward GAAP P/E

7.34

peg ratio

0.07

price/sales

0.63

price/book

1.44

EV/sales

0.88

Mobile EV/EBITDA

4.43

forward EV/EBITDA

4.24

Source: Looking for alpha

It’s also worth noting that ASX valuations are more than reasonable. For example, ASX has an enterprise value of $18.46 billion, which equates to approximately 4.2 times EBITDA going forward and 4.4 times EBITDA at the end. By comparison, the industry medians are 12x and 13x respectively. The table above shows some of the multiples that the ASX trades at.

Investor Conclusions

The ASX has done better than most semis in 2022 and the year is drawing to a close. The stock has lost ground, but not as much as many other stocks. A recent rally has cut losses to date, but there are reasons to believe that the stock should pull back in the near term. Stocks have moved a lot in recent weeks and stocks are facing resistance, which means some type of correction is likely to be expected. It is unlikely that shares will continue to rise as they have in recent weeks.

I am bullish on ASX, as previously stated in a previous article. ASX is worth buying with its dividend and multiples on the low side, but with the caveat that the stock is more likely to head lower than higher in the near term. Anyone buying at this time should be aware that there is a chance that they may be facing short-term hiccups. Some may want to move from ASX for this reason, especially if they can only hold a stock for a short time.

Buyers may want to wait and see what the stock does now that it is facing resistance. The stock is near resistance, which is not a good entry point, to say the least. Some may also want to lock in gains by taking a few chips off the table, especially with the gains stocks have made in recent weeks and resistance close by. If someone entered the recent lows, now is a good time to do so.

The industry and ASX are headed for a rough patch as demand for semiconductors is likely to weaken rather than strengthen in the coming quarters, making it difficult for stocks to perform well in the near term. Those looking for immediate payouts should probably look elsewhere for these reasons.

Those with a longer-term view are better off concentrating on the ASX’s innate strengths. Of course, the balance sheet needs to work with debt that exceeds cash by the billions, but nothing that can’t be dealt with. ASX continues to be in the best position to take advantage of the growth in the OSAT market, especially with advanced packaging likely to gain prominence in the semiconductor industry.

Simply put, there is a reason the ASX has outperformed in what has been a very difficult year for stocks, particularly the semis. There are more positives to ASX than negatives. The stock may be down in the short term, but in the long term ASE Technology Holding Co., Ltd. still makes more sense with how the cards are distributed.

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