On Monday, Morgan Stanley (NYSE:MS) adjusted its stance on ASE Technology Holding Co (NYSE:ASX) Ltd. shares (3711:TT) (NYSE: ASX), shifting the rating from Overweight to Equalweight. Despite this change, the firm raised its price target to NT$172.00 from the previous NT$150.00.
The alteration in the stock's outlook is due to concerns about the company's limited exposure to AI and leading-edge earnings, which are expected to constitute only a mid-single digit percentage of the firm's 2024 Advanced Technology Manufacturing revenue.
The analyst noted that while a stronger second half of the year is anticipated due to seasonality, a significant or widespread recovery in end demand has not yet been observed. This tempered outlook on end demand recovery contributes to the rationale behind the downgrade.
The new price target of NT$172.00 takes into account potential revenue and margin increases from 2.5D packaging but suggests that the valuation is now in line with historical averages.
The updated stock price target is based on 12 to 13 times the firm's estimated earnings per share (EPS) for 2025, which Morgan Stanley considers to be a fair valuation when compared to the company's 10-year average price-to-earnings (P/E) ratio of 12 times. This assessment reflects the expectation that the stock's potential for further re-rating is limited due to the company's modest AI revenue projections.
The report emphasizes that ASE Technology's stock adjustment is rooted in the balance between expected seasonal strength in the latter half of the year and the current market expectations that may already reflect this outlook. The firm's new valuation also acknowledges the upside from the company's 2.5D packaging business, which is expected to contribute positively to ASE Technology's financial performance.
In summary, the downgrade to Equalweight from Overweight by Morgan Stanley reflects a cautious approach towards ASE Technology's growth prospects in the AI sector. The revised price target acknowledges both the anticipated benefits from the company's packaging technology and the need to align the stock's valuation with historical norms.
In other recent news, ASE Technology Holding Co., Ltd. reported a mix of developments in its Q1 earnings call for 2024. Despite facing a decline in overall demand due to electronics product seasonality, the company saw an improved performance in its advanced services and reported a 1% year-over-year increase in revenue.
The ATM business revenues exceeded expectations and the EMS business demand was slightly ahead. ASE Technology also plans to increase its CapEx by 10%, focusing on advanced packaging and test capabilities, particularly in AI applications.
The company's consolidated net revenues fell 17% sequentially but rose 1% year-over-year, and the gross profit reached $20.9 billion with a 15.7% margin. The company also expects mid-single digit quarter-over-quarter growth for its ATM business in Q2.
These recent developments indicate a focus on expansion and increased investments in R&D as part of ASE Technology's growth strategy. Still, the company is also anticipating a potential negative impact on ATM gross margin in Q2 due to increased electricity rates. Despite these challenges, ASE Technology remains confident about reaching its structural gross margin target of 25% to 30% in the second half of the year.
InvestingPro Insights
In light of Morgan Stanley's recent rating adjustment for ASE Technology Holding Co Ltd (NYSE: ASX), InvestingPro data provides additional context that investors may find valuable. ASE Technology's market cap stands at a robust $23.01 billion, while the company's P/E ratio is currently 23.77, aligning closely with the adjusted P/E ratio for the last twelve months as of Q1 2024, which is 23.89. These metrics suggest a relatively stable valuation that fits with Morgan Stanley's assessment of the stock's alignment with historical averages.
The company's consistent dividend history, with payments maintained for 7 consecutive years and a current dividend yield of 2.02%, could be a point of interest for income-focused investors. Moreover, ASE Technology has experienced a large price uptick over the last six months, with a 26.42% total return, indicating a strong recent performance that might appeal to growth-oriented investors. This is underscored by the fact that the stock is trading near its 52-week high, at 93.13% of the peak.
For those looking to delve deeper into ASE Technology's financials and future prospects, InvestingPro offers additional insights. There are more InvestingPro Tips available, which can be accessed through InvestingPro's platform. For those interested in a subscription, use the coupon code PRONEWS24 to get an additional 10% off a yearly or biyearly Pro and Pro+ subscription.
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