Why is this tech growth stock down 38% from its 52-week high?

Photonics (PLAB 2.12%)The technology company, which makes microchips and flat-panel displays (FPDs), beat estimates for its stock late last month in earnings — and posted its sixth straight quarter of record earnings.

But the semiconductor stock is down more than 38% from its 52-week high reached last month. Why did the stock fall and what can investors expect in the future?

The only pure-play photo mask company in the US

Phototronics is the world’s largest manufacturer of photomasks, photographic quartz plates used to make miniature electronic circuits. Primarily known for their use in semiconductors, photomasks are used in a variety of high-tech products, including mobile devices, TVs, PCs, and FPDs.

Self-proclaimed “a pure-play photomask company in the US,” Photronics offers unique exposure to the global market. In fact, more than half of the company’s revenue comes from products manufactured and sold in Asia. Supporting a truly global customer base, Photronics operates from 11 strategically located facilities around the world.

The company has seen growth recently, particularly in the mobile display and integrated circuit (IC) sectors. IC revenue rose 37 percent year-over-year in the third quarter of 2022 (ended July 31), and FPD revenue rose 11 percent to $58.7 million.

Strong demand and improved pricing have driven the company’s growth in the premium segment and in its core markets. Tiny and ubiquitous, semiconductors can now be found in countless products. Phototronics continues to adapt and innovate with new use cases for its photomask technology.

Record income and profits

For the third fiscal quarter, Photronics set new company records for both revenue and profit. Quarterly revenue stood at $219.9 million, up 29 percent year-over-year and up 8 percent from the prior quarter. Most impressively, net income rose 83 percent to $31.2 million from the prior-year quarter.

The company’s balance sheet also strengthened, with cash and equivalents rising to $381 million, $93 million coming directly from operations, and debt falling 50% to $57 million.

So why did the stock drop?

Although the company beat Wall Street on both the top and bottom lines for its fiscal third quarter, Photronics stock fell more than 23 percent the day after the report was released.

The main sticking point for investors appears to be the administration’s fiscal fourth-quarter guidance. The company offered a fourth-quarter revenue outlook of $205 million to $215 million — slightly below the $214 million analyst consensus.

A significant shortage of photomasks has increased lead times for phototronics, which is now struggling with a backlog of orders and capacity constraints. The company also noted in its recent earnings call that demand from high-end customers has slowed, but that core demand remains strong.

These two headwinds factored into Photronic’s guidance, and although management kept its expectations right, investors were disappointed by the outlook. Accustomed to quarter after quarter of record earnings for the company, is the market overhyped?

The future is still bright.

Despite recent setbacks, CFO Frank Lee asserted that Photronics is on track for its best year ever. The company reached a 25-year record-high gross margin of 38%, benefiting from cost controls, higher prices and improved operational capabilities at most of its facilities.

Recognizing its capacity constraints, Photronics has focused on expanding production volumes while keeping costs down and maintaining high margins. The company has improved its pricing strategy to extract maximum value from its products.

With a healthy cash balance for expansion and investments, Photronics is determined to remain the market leader in photomask manufacturing. The company will have to contend with some near-term hurdles first, but this high-growth technology stock is worth checking out as a buy-and-hold opportunity.

Micah Angel has no place in the mentioned shares. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.

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