AOSL - Is This Stock Low Risk And High Reward In The Semi Conductor Industry

The Company:

Alpha and Omega Semiconductor Limited AOSL designs, develops, and supplies power semiconductor products for computing, consumer electronics, communication, and industrial applications. Their products are used in dozens of applications and industries.

The Good:

AOSL has substantially increased profit margins leading to first profitable year this is largely due to current international semiconductor shortages. This company is financially stable with more than enough assets to cover liabilities both near and long term (Current ratio 1.75X). Recently they have increased debt levels but have used debt efficiently and conservatively to grow business. AOSL stock is undervalued from a relative perspective priced with a P/E ratio of 13% compared to the industries 30%. Earnings are forecasted to grow at nearly 24% while the semiconductor industry is forecasted at 15%. Lastly analysts forecasted price for AOSL is $39.5 per share implying a nearly 38% upside for this stock.

The Bad:

Various insiders have been selling stock throughout 2020/21 this isn’t great but it also isn’t necessarily bad as insiders sell stock for a multitude of reasons. AOSL has facilities in China and is subject to risks associated with operating a business in a communist country. No doubt this company has had an amazing year however companies guidance shows slowing down with an increase of revenue at 18.7% for Q1 2022 as well as gross margins expected to decline. This will be due to the fact that they are now operating at full manufacturing capacity and will inevitably have to turn down orders.

Conclusion:

AOSL can still grow with its manufacturing constraints by focusing on higher margin products luckily whatever they produce will get sold due to limited global supply. Overall this company is fairly valued when compared to the industry. Couple this with strong financials and we like this stocks risk/reward prospects.

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