Semiconductor photomask manufacturer Photronics (NASDAQ:PLAB) reported Q3 CY2024 results topping the market’s revenue expectations , but sales fell by 2.1% year on year to $222.6 million. Guidance for next quarter’s revenue was better than expected at $212 million at the midpoint, 1% above analysts’ estimates. Its non-GAAP profit of $0.59 per share was 13.5% above analysts’ consensus estimates.

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“We achieved sequential revenue growth in the fourth quarter, with increased sales in both Integrated Circuits (IC) and Flat Panel Displays (FPD),” said Frank Lee, chief executive officer.

Company Overview

Sporting a global footprint of facilities, Photronics (NASDAQ:PLAB) is a manufacturer of photomasks, templates used to transfer patterns onto semiconductor wafers.

Semiconductor Manufacturing

The semiconductor industry is driven by demand for advanced electronic products like smartphones, PCs, servers, and data storage. The need for technologies like artificial intelligence, 5G networks, and smart cars is also creating the next wave of growth for the industry. Keeping up with this dynamism requires new tools that can design, fabricate, and test chips at ever smaller sizes and more complex architectures, creating a dire need for semiconductor capital manufacturing equipment.

Sales Growth

Examining a company’s long-term performance can provide clues about its quality. Any business can put up a good quarter or two, but the best consistently grow over the long haul. Luckily, Photronics’s sales grew at a decent 9.5% compounded annual growth rate over the last five years. Its growth was slightly above the average semiconductor company and shows its offerings resonate with customers. Semiconductors are a cyclical industry, and long-term investors should be prepared for periods of high growth followed by periods of revenue contractions.

We at StockStory place the most emphasis on long-term growth, but within semiconductors, a half-decade historical view may miss new demand cycles or industry trends like AI. Photronics’s recent history shows its demand slowed as its annualized revenue growth of 2.5% over the last two years is below its five-year trend.

This quarter, Photronics’s revenue fell by 2.1% year on year to $222.6 million but beat Wall Street’s estimates by 2.1%. Company management is currently guiding for a 2% year-on-year decline in sales next quarter.

Looking further ahead, sell-side analysts expect revenue to grow 8.4% over the next 12 months, an improvement versus the last two years. This projection is above average for the sector and implies its newer products and services will catalyze better top-line performance.

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Product Demand & Outstanding Inventory

Days Inventory Outstanding (DIO) is an important metric for chipmakers, as it reflects a business’ capital intensity and the cyclical nature of semiconductor supply and demand. In a tight supply environment, inventories tend to be stable, allowing chipmakers to exert pricing power. Steadily increasing DIO can be a warning sign that demand is weak, and if inventories continue to rise, the company may have to downsize production.

This quarter, Photronics’s DIO came in at 37, which is one day below its five-year average. Flat versus last quarter, there’s no indication of an excessive inventory buildup.

Key Takeaways from Photronics’s Q3 Results

We were impressed by how significantly Photronics blew past analysts’ EPS expectations this quarter, driven by revenue and profit outperformance vs Wall Street’s estimates. Guidance was also solid, with next quarter's revenue outlook ahead of expectations while EPS was in line. Overall, we think this was a good quarter, especially considering some of the uneven recent earnings performance across the sector. The stock traded up 9.9% to $27.83 immediately after reporting.

Sure, Photronics had a solid quarter, but if we look at the bigger picture, is this stock a buy? What happened in the latest quarter matters, but not as much as longer-term business quality and valuation, when deciding whether to invest in this stock. We cover that in our actionable full research report which you can read here, it’s free.