12-04-2016, 04:05 PM
essentially this is a small company with zero market power. Being a contractor, it is on the tail end of the whip of the Amat's performance and in general the semiconductor industry.
Semiconductor is a cyclical industry. Structurally it has to be like this because of strong competition, technology churn and most importantly long lead times for capacity increase to take effect ( managers plan to expand capacity 2 years in advanced based on market forecast now. when recession hits, planned capacity has to go ahead. its like the shipping industry).
Where are we in the cycle? are we nearer to the top? what comes after the top is reached? i think investors who chase this stock for yield may be sorely disappointed as the economy continues to slow down.
not to mention this company faces a binary scenario as well. almost ALL of its revenue comes from one customer! this contract ends in 2017. will AMAT allow this small insignificant company to continue having such good margins, especially in view of the tough times ahead?? i will say low probability. AMAT will seek to maximise its profit. UMS does not have market power. It IS replacable. will Amat not extend the contract? the probability is there too, although i see it more likely that UMS settle for a much less lucrative contract.
Semiconductor is a cyclical industry. Structurally it has to be like this because of strong competition, technology churn and most importantly long lead times for capacity increase to take effect ( managers plan to expand capacity 2 years in advanced based on market forecast now. when recession hits, planned capacity has to go ahead. its like the shipping industry).
Where are we in the cycle? are we nearer to the top? what comes after the top is reached? i think investors who chase this stock for yield may be sorely disappointed as the economy continues to slow down.
not to mention this company faces a binary scenario as well. almost ALL of its revenue comes from one customer! this contract ends in 2017. will AMAT allow this small insignificant company to continue having such good margins, especially in view of the tough times ahead?? i will say low probability. AMAT will seek to maximise its profit. UMS does not have market power. It IS replacable. will Amat not extend the contract? the probability is there too, although i see it more likely that UMS settle for a much less lucrative contract.