AEM Holdings (SGX:AWX) is one of the latest dominant IT Singapore stocks of the new generation.
It has become a major contract manufacturer. Helping many semiconductor firms design and test their chips.
I last wrote about AEM Holdings here.
Last year, AEM won Forbes’ Asia Best 200 Under a Billion List.
And so far, AEM shares grew 150% since last year March 2020.
Source: ShareInvestor Webpro
Once considered a penny stock, today, AEM is a S$1 billion market cap company.
AEM Holdings falls right into a category of a “strong asset-light” business.
And what’s even more interesting right now, its shares were bought by Temasek Holdings.
From a numbers perspective, AEM shares look interesting.
AEM achieved its second-highest first quarter revenues of S$80 million.
And will ramp up its volume at customers’ sites later this year.
What’s more is, management expects the company to produce S$460 million to S$520 million revenues by second half of 2021.
The problem of AEM
But what’s not so clear is this.
Most of their revenues comes from only one key customer — Intel Corporation.
But concentration risk is not the main problem I’m concerned.
You see, Intel is a leader in microprocessor chips.
It’s famous for making its x86 chips in PCs and big server systems (for example, servers in data centres).
Intel differentiated from the competition by improving its chip power, reduce cost and size.
And they do it because they invested heavily in R&D.
But the company, and the stock market, has been overly optimistic about Intel and AEM Holdings.
In recent years, Intel struggled to produce chips required for the PC market.
And many of its big customers are turning to other chip makers like TSMC.
In fact, for the first time, Intel has lost its PC business in Apple’s M1 “Arm-based” chips to Intel.
Arm-based chip, like Intel’s x86 chips, is another chip technology that’s produced by TSMC.
That’s not the end.
AMD, another of Intel’s competitors is also competing fiercely against Intel on the PC market.
AMD chips are better designed, much faster and super competitive in the PC and server systems market.
The very markets Intel once dominated in.
In Intel’s latest financial quarters, Intel’s overall revenues and operating profits have been steady.
But a closer look at one of its key segments, Data Center Group saw revenues and operating profits down.
And that’s because of a “challenging compare and competitive environment” as stated by management.
Data Center Group segment sells processors and chipsets designed for enterprise, communications and computing businesses.
I’d say Intel is right in the middle of a fast-changing technology environment with intense competition.
Imagine that competitors are all over Intel right now. And that smells trouble.
Here’s the other thing.
Intel has been so focused on producing chips for PC market that it has neglected another huge potential — smartphones.
Not going into smartphones have also caused Intel also of lost opportunities.
Its delay is causing competitors like AMD to catch up.
Intel hasn’t made any success in chips for smartphones, thus losing out to its other competitors. This comes as the decline of PC over the past decade.
Temasek has to do more than putting in S$103 million
So far, from the way I see is Intel’s success is in its cloud computing business.
If you ask me, I think AEM Holdings would financially benefit from Temasek’s new acquisitive stake.
But it’s hard to tell whether the sovereign wealth fund is a financial or strategic investor.
And what I think has to happen is Temasek needs to do more than simply pump in money to AEM.
It has to help AEM diversify its customer base.
Otherwise, it’s hard for AEM shares to continue growing in the long term.
Sometimes, investing can be simple.
Always here for you,
Willie Keng, CFA
Founder, Dividend Titan
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