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ASE Technology Stock Is Up Against Resistance (NYSE:ASX)

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ASE Technology Holding Co., Ltd. (NYSE:ASX) was on a tear in recent weeks, but the rally seems to have stalled in the last week or so. The stock’s value has appreciated by a third after the move up, but the charts suggest resistance is in the way, making further gains difficult, although not impossible. It also opens up the possibility of a pullback, especially with the stock having gained as much as it has in recent weeks. Still, ASX is worth holding, even if it may be due for some setbacks in the short term. Why will be covered next.

Resistance is blocking the way higher

The chart below shows how the stock has struggled in 2022, similar to other semis, although it has done better recently. Note how ASX appeared to have double bottomed, which is seen as a bullish signal. The stock bounced in the $5 region in late September after doing the same in early July. However, the U.S. government imposed new export rules in early October aimed at China, which caused a selloff in the semiconductor sector. ASX was pulled along as the leading provider of OSAT services to the semiconductor market.

ASX chart

Source: finviz.com

The stock fell to new lows for the year on October 11, closing the day at $4.61, but it has since gone on a major rally, resulting in ASX gaining 38% in value in roughly one month. Notice how the stock was able to overcome the descending trendline on a second attempt. This helped reduce YTD losses to 19%. In comparison, most semis have done worse.

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

Still, it’s worth mentioning that the rally in ASX stock has stalled in recent days. The stock seems to be having trouble moving past the $6.00-6.50 region, having spent most of last week stuck in this region. It appears resistance in the $6.00-6.50 region is standing in the way of the stock, which would not be so unprecedented since the stock has topped out before in this exact region.

Note how the stock went on a rally in July after bottoming, which topped out in the $6.00-6.50 region with the stock unable to overcome what looks to be stiff resistance. It’s also worth mentioning that the same $6.00-6.50 region used to provide support for the stock earlier in the year. Note how the stock bounced several times in the $6.00-6.50 region until the stock broke support in June.

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

Why the stock may find it hard to keep rallying in the short term

The stock is likely to face a pullback with resistance in the way and the stock having gained as much as it has in recent weeks. In addition, it’s also worth mentioning that after a long period of growing demand, which helped ASX grow the top and the bottom lines, ASX is now faced with a slump in demand in the near term.

A growing number of high-profile semiconductor names like AMD (AMD) and Texas Instruments (TXN) have suggested semiconductor demand is on the way down. The most recent earnings report from ASX seems to corroborate this if the outlook is any indication. Still, ASX did manage to beat expectations for the top and the bottom line in Q3.

Q3 revenue increased by 25% YoY to NTD188,626M, which is equal to $6.26B using an exchange rate of 1:30.1 for the U.S. dollar. Earnings per share increased by 23% YoY to NTD3.92, which translates to $0.26 per ADS. EBITDA was NTD38,601M in Q3 FY2022, up from NTD32,655M in Q3 FY2021. Keep in mind that ASX disposed of some of its facilities in China in late 2021.

On a pro forma basis, which excludes the contributions from disposed assets in Q3 FY2021, revenue increased by 31% YoY and EPS increased by 31% YoY. 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 table below shows the numbers for Q3 FY2022.

(Unit: NTD M, except EPS)

Q3 FY2022

Q2 FY2022

Q3 FY2021

QoQ

YoY

Revenue

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

15%

29%

Net income attributable to shareholders

17,465

15,988

14,176

9%

23%

EPS

3.92

3.61

3.20

9%

23%

Source: ASX

However, while Q3 quarterly results were still solid, the outlook sees growth slowing down substantially. Demand is weakening for a variety of reasons. From the Q3 earnings call:

“For the fourth quarter, we see a generally softening environment. There will be some products that remain relatively strong, but issues with potential recessions and anti-inflationary policies look to be dampening overall demand. Even looking beyond the fourth quarter, our customer forecasts are also experiencing in an additional level of volatility as customers balance inventory reduction with product demand. Despite adjusting downward, forecast movements are on balance, very controlled. We do see this environment continuing to stretch into the first half of 2023.”

In addition, while it may be too early to say for sure, management believes FY2023 is shaping up to be flat in terms of growth.

“I think it’s, we’re not different from anybody else in the industry that we are facing the same uncertainties in front of us. And our best estimate for the year is that, we should be looking at a flattish year. And given our position, we remain confident that we will outperform the industry as a whole and also the our competitors.

Going into the first quarter, I think the – I think the same pattern remains that the automotive and networking will continue to be performing stronger than the other sectors. And I think the industry inventory digestion will continue in the first half of next year. And also the new restrictions imposed by the U.S., 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.”

In comparison, revenue grew by 30.4% YoY and EPS grew by 49.4% YoY in the first three quarters of FY2022, both on a pro forma basis. By next year, both could be down to zero.

Why some may want to stick with ASX for the long haul

Flat growth is a step down from prior years, but it would also be better than what many semis are likely to achieve next year. ASX could outperform, especially if there’s increased uptake of advanced packaging in the industry, which is not that different from what ASX has done this year. Flat growth would also make it likely ASX maintains its dividend of $0.47, which translates to a yield of 7.4%.

Keep in mind that ASX has earned $0.71 in Q1-Q3 and it is projected to earn $0.91 in FY2022 by the end of the year. If ASX earns a similar amount in FY2023 as it did in FY2022, or something close to it, then a dividend of $0.47 looks attainable in 2023, unless earnings fall more than expected and ASX has to reduce the dividend accordingly.

ASX

Market cap

$13.08B

Enterprise value

$18.46B

Revenue (“ttm”)

$21,131.5M

EBITDA

$4,282.7M

Trailing 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

Trailing EV/EBITDA

4.43

Forward EV/EBITDA

4.24

Source: Seeking Alpha

It’s also worth pointing out that valuations for ASX are more than reasonable. For instance, ASX has an enterprise value of $18.46B, which is equal to about 4.2 times EBITDA on a forward basis and 4.4 times EBITDA on a trailing basis. In comparison, the median for the sector are 12x and 13x respectively. The table above shows some of the multiples ASX trades at.

Investor takeaways

ASX has done better than most semis in 2022 with the year coming to a close. The stock has lost ground, but not as much as many other stocks. A recent rally has narrowed YTD losses, but there is reason to believe the stock is due for a pullback in the short term. The stock has moved greatly in recent weeks and the stock is up against resistance, which means some sort of correction is probably to be expected. Odds are the stock is unlikely to keep soaring higher like it did in recent weeks.

I am bullish on ASX, as stated before 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 be heading lower than higher in the very near term. Anyone buying at this time needs to be aware there is a chance he/she may be faced with setbacks in the short term. Some may want to pass on ASX for this reason, especially if they can only hold on to a stock for a short while.

Buyers may want to wait to see what the stock does now that it is up against resistance. The stock is close to resistance, which is not a good entry point to say the least. Some may also want to lock in profits by taking some chips off the table, especially with the gains the stock has made in recent weeks and resistance close by. If anyone got in at the recent lows, then now is a good time to be doing this.

The industry and ASX are heading for a tough stretch with semiconductor demand more likely to get weaker than stronger in the coming quarters, which will make it hard for the stock to do well in the short term. Those who are looking for immediate payoffs should probably look elsewhere for these reasons.

Those with a more long-term view are better off focusing on the innate strengths of ASX. Granted, the balance sheet needs work with debt exceeding cash by billions, but nothing that cannot be dealt with. ASX is still best placed to take advantage of growth in the OSAT market, especially with advanced packaging very likely to gain prominence in the semiconductor industry.

Bottom line, there is a reason why ASX had outperformed in what has been a very difficult year for stocks, semis in particular. There are more positives to be found in ASX than negatives. It’s possible the stock is heading lower in the short term, but long ASE Technology Holding Co., Ltd. still makes the most sense with the way the cards are laid out.

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