Key Points
Ultra Clean rallied after a strong beat-and-raise quarter.
Management also forecast higher gross margin targets in the future.
Ultra Clean is an intriguing smaller and cheaper way to play the AI boom.
Shares of Ultra Clean Holdings (NASDAQ:UCTT) rallied as much as 10.1% on Wednesday, before pulling back to an 8.6% gain on the day.
Ultra Clean is a key supplier to several of the large semiconductor equipment companies involved in etch and deposition. Given that its customers are seeing booming sales and orders, Ultra Clean is, too.
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Additionally, AI-related stocks are rallying across the board today on the back of strong earnings in the sector and Monday's filing of Anthropic’s S-1.
Ultra Clean beats and raises
In the September quarter, Ultra Clean posted fantastic growth, with revenue surging 48.8% to $759 million and adjusted earnings per share up 64.3% to $1.15. Both figures beat analysts' expectations. Furthermore, Ultra Clean's guidance for the current quarter was $800 million to $860 million, with the $830 million midpoint well ahead of analyst estimates of $813.9 million. Perhaps even more notable, management forecast a path to higher gross margins, with a longer-term target of 20%, above last quarter's 17.3%.
Ultra Clean's better-than-expected earnings report and outlook came amid strong moves higher across the AI-related semiconductor sector today. The sector is bouncing off a rather severe sell-off that began in July and accelerated in the first part of October. Ultra Clean, for its part, entered today down by about two-thirds from its June highs, marking a very severe decline.
The bounce in AI stocks appears to be due to continued strength this earnings season, lower valuations, and the release of Anthropic's S-1 on Monday, which showed massive growth and operating profitability over the past two quarters, along with other bullish data points, including a wide range of Fortune 500 customers using Anthropic's service.
Image source: Getty Images.
Ultra Clean is back at a discount
At the moment of this writing, Ultra Clean now trades at just 18.0 times this year's earnings estimates and just 9.0 times next year's earnings estimates.
That's extremely cheap for an AI stock, and potentially makes Ultra Clean an under-the-radar value. However, it should be noted that Ultra Clean has an extreme customer concentration, with its top three customers accounting for 70%-80% of overall revenue. That increases risk; however, UCTT's low valuation relative to other AI stocks could make it worth it.
Billy Duberstein and/or his clients have no position in any of the stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.