SiC Electrification Tailwinds Will Likely Be Outweighed By Memory Margin Pressure

Catalysts

About Axcelis Technologies

Axcelis Technologies supplies ion implantation equipment and aftermarket services to semiconductor manufacturers across power, memory and logic markets.

What are the underlying business or industry changes driving this perspective?

• The company expects flat overall revenue in 2026 with a year-over-year decline in power and general mature markets. If electrification and related chip demand take longer to translate into new fab tools, Axcelis could see muted system orders and slower revenue growth than investors may be assuming.
• Management highlights strong long-term demand tied to electric vehicles and wider use of silicon carbide. However, customers are currently in a digestion phase and prioritizing technology transitions over fresh capacity, which could restrain new system shipments and put pressure on earnings if this cautious spending persists.
• AI related memory demand is a key growth theme. At the same time, Axcelis indicates that DRAM expansion is constrained by cleanroom space and that NAND does not currently require more ion implantation, so any delay in fab buildouts or a more modest DRAM CapEx cycle could limit upside to revenue and weigh on gross margins given expected lower memory margins.
• The company anticipates lower non GAAP gross margins in 2026 in the low to mid 40% range due to a heavier mix of memory systems and incremental tariff costs. If memory pricing or mix is less favorable than expected, margins and net income could undershoot market expectations.
• China represented 42% of 2025 revenue and is expected to be flat to slightly down in 2026 while customers digest prior mature node investments. Any prolonged pause or tighter export or tariff conditions could drag on system and CS&I revenue, as well as free cash flow generation.
• The pending Veeco merger is framed as a long term opportunity. Integration work, transaction expenses and regulatory timing, especially in China, could absorb management attention and introduce execution risk that affects operating expenses, operating margins and earnings in the near to medium term.

Assumptions

How have these above catalysts been quantified?

• This narrative explores a more pessimistic perspective on Axcelis Technologies compared to the consensus, based on a Fair Value that aligns with the bearish cohort of analysts.
• The bearish analysts are assuming Axcelis Technologies's revenue will grow by 15.5% annually over the next 3 years.
• The bearish analysts assume that profit margins will increase from 10.7% today to 14.7% in 3 years time.
• The bearish analysts expect earnings to reach $195.6 million (and earnings per share of $8.21) by about August 2029, up from $92.8 million today. However, there is some disagreement amongst the analysts with the more bullish ones expecting earnings as high as $259.5 million.
• In order for the above numbers to justify the price target of the more bearish analyst cohort, the company would need to trade at a PE ratio of 30.1x on those 2029 earnings, down from 42.3x today. This future PE is lower than the current PE for the US Semiconductor industry at 46.0x.
• The bearish analysts expect the number of shares outstanding to decline by 0.38% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 11.29%, as per the Simply Wall St company report.

Risks

What could happen that would invalidate this narrative?

• Secular growth in silicon carbide adoption for electric vehicles, industrial power electronics and grid applications, combined with Axcelis' positioning in silicon carbide ion implant tools and 150 millimeter to 200 millimeter upgrade activity, could support more resilient power related system and CS&I revenue than a prolonged downturn thesis assumes. This would be supportive for overall revenue and earnings.
• Management repeatedly highlights long term electrification trends and the expected need for more efficient power generation, delivery and use across silicon, silicon carbide and gallium nitride. If these secular drivers translate into sustained tool demand once the current digestion phase clears, power and general mature revenue and CS&I revenue could stabilize or grow instead of contracting, which would help protect operating margins and net income.
• AI driven DRAM and HBM demand is already leading to stronger DRAM related orders, broadening Axcelis' memory customer base into a leading North American manufacturer. If planned new DRAM fabs and cleanroom expansions proceed as described, memory system revenue could scale materially from a low 2025 base and offset weakness in other segments, supporting gross margin dollars and earnings.
• The CS&I aftermarket business delivered record quarterly revenue of $82 million and full year growth of 14% in 2025. If the installed base continues to expand with ongoing upgrades such as silicon carbide 150 millimeter to 200 millimeter conversions and higher tool utilization, this recurring oriented stream could provide steadier cash generation and support gross margins and free cash flow even if new system shipments are volatile.

Valuation

How have all the factors above been brought together to estimate a fair value?

• The assumed bearish price target for Axcelis Technologies is $140.0, which represents up to two standard deviations below the consensus price target of $161.0. This valuation is based on what can be assumed as the expectations of Axcelis Technologies's future earnings growth, profit margins and other risk factors from analysts on the more bearish end of the spectrum.
• However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of $198.0, and the most bearish reporting a price target of just $140.0.
• In order for you to agree with the more bearish analyst cohort, you'd need to believe that by 2029, revenues will be $1.3 billion, earnings will come to $195.6 million, and it would be trading on a PE ratio of 30.1x, assuming you use a discount rate of 11.3%.
• Given the current share price of $127.07, the analyst price target of $140.0 is 9.2% higher.
• We always encourage you to reach your own conclusions though. So sense check these analyst numbers against your own assumptions and expectations based on your understanding of the business and what you believe is probable.