Lot of Opportunities in Technology stock

Technology stocks have taken a beating in recent months as a result of growing inflation, which could lead to higher interest rates. Technology stocks, which were previously overvalued, have now been reduced to a more reasonable valuation.

Warren Buffett said “Be greedy when others are fearful”; because the fall in the stock price of a good company is the best time for investors to accumulate shares.

Today the stock we will be talking about is Inari, which is one of the technology stocks in Malaysia that has benefited from the 5G trends.

Marco economics

COVID-19 has caused supply chain issues and prolonged shutdown in China resulted chip shortage in 2020 and is expected to last until 2023. This results in a higher ASP for the semiconductor industry.

As we move forward, we do believe the growth rate and earnings of semiconductor companies will start to normalise as the industry overcome the chip shortage. This will result in normalise net income margin in semiconductor company in the future and which might impact the stock price trend of the semiconductor company, where AR, VR, autonomous driving, and data centres have become increasingly important, the demand and market for semiconductors will only grow bigger and bigger each year.

Inari

Inari is one of the biggest outsourced semiconductor assembly and test ("OSAT") service providers for the semiconductor industry, covering radio frequency ("RF"), fiber-optic transceivers, optoelectronics, sensors, and custom integrated circuit technologies. The company's revenue growth has a relationships to the number of iPhones sold because one of the key major customers is Broadcom which are the company that help to manufacture certain key component of the iPhones.

The company had a strong Q2 2022 performance. The company brought in RM 420 million in revenue, up 11.5 percent year on year. In addition, the company's net income increased by 19.9% year on year to RM 108 million. The management stated that in 2HFY22, the growth momentum for radio frequency (RF) is expected to remain steady, supported by legacy RF products as it prototyping and fine-tuning for the new smartphone cycle.

In 2022, the company will continue to expand its current production capacity while also investing in wafer frontend, assembly, and test technologies to improve the Group's revenues and profitability. The company plans to invest around RM100 million in capital expenditures to upgrade its current production equipment and facilities.

Key Risks

Despite being one of the largest semiconductor companies in Malaysia and a good company that consistently giving a good return back to investor, however the customer concentration is one of the big risk when it come to invest in Inari.

Customer A, Broadcom, which is one of the apple chips suppliers, has contributed 89% of Inari's total revenue. Losing Broadcom as a customer could be disastrous for the company's bottom line. When news broke that Broadcom wanted to sell its radiofrequency business in 2019, the company's stock price plummeted. Luckily, the company decided not to sell its radiofrequency chip business because Apple planned to buy the component from Broadcom for its 5G smartphone. Apple is projected to pay $15 billion to Broadcom in a series of supply agreements ending in 2023 which will benefit Inari indirectly in the future.

Fundamental and Prospects

In term of financial numbers, the company show a very good growth in revenue, net income and its operating efficiency. In term of revenue growth, the company achieved a solid revenue growth of 35% from FY 2020 to FY 2021. The net income of the company also grew 111.4% from RM 156 million to RM 330 million.

In term of gross profit margin, the company increased its gross profit margin from 20.44% in 2020 to 29.67% in 2021. The ROE of the company for its FY 2021 is 17.01% which shows that the company has done great in generating good return to the shareholders using the company equity.

The company also has a strong balance sheet with RM1,948 million in cash and RM2.7 million in debt. This shows that the company has very strong financial strength to continue expanding its business or has enough liquidity to withstand any short-term pressure on its business.

Current Valuation

Despite Inari share price has fall a lot from its all time high, the company is still trading at a higher PE multiple compared to its historical averages PE of 22.  The company currently have a PE of 28 and with its customer concentration risk, I think investor who wished to own Inari can be patient and wait for a higher margin of safety before accumulating the shares.

Let’s turn our attention to Technical Aspect of Inari

Based on Inari weekly chart, we can easily spot a climatic volume happened right at the top of the chart. Climatic volume or Buying Climax is the sign of distribution and investors should be careful if the chart shows more Sign of Weakness.

Notice the confirmation of distribution appeared with the Sell-Off + Red Pentagon bar on January 2022.

Here is the definition on Buying Climax by VSA expert Philip Friston

Buying Climax is a bar with a high to super-high volume. It identifies professional sells and shows that supply surpassed demand. In order to sell, specialists should unload in the growing market, selling to “the crowd. This bar should reach new fresh highs.

You can watch the short video tutorial for climatic volume

https://youtu.be/HWnCQh97i4g

Inari daily chart also show lots of Inverse Pullback with Up-thrust. We will explain this setup in the upcoming article.

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Disclaimer

This information only serves as reference information and does not constitute a buy or sell call. Conduct your own research and assessment before deciding to buy or sell any stock