The past six months have been a windfall for Photronics’s shareholders. The company’s stock price has jumped 115%, setting a new 52-week high of $49.99 per share. This was partly thanks to its solid quarterly results, and the performance may have investors wondering how to approach the situation.
Is there a buying opportunity in Photronics, or does it present a risk to your portfolio? See what our analysts have to say in our full research report, it’s free.
Why Is Photronics Not Exciting?
We’re glad investors have benefited from the price increase, but we're cautious about Photronics. Here are three reasons we avoid PLAB and a stock we'd rather own.
1. Revenue Tumbling Downwards
We at StockStory place the most emphasis on long-term growth, but within semiconductors, a stretched historical view may miss new demand cycles or industry trends like AI. Photronics’s recent performance marks a sharp pivot from its five-year trend as its revenue has shown annualized declines of 2% over the last two years. 
2. Projected Revenue Growth Is Slim
Forecasted revenues by Wall Street analysts signal a company’s potential. Predictions may not always be accurate, but accelerating growth typically boosts valuation multiples and stock prices while slowing growth does the opposite.
Over the next 12 months, sell-side analysts expect Photronics’s revenue to rise by 3.8%. While this projection implies its newer products and services will fuel better top-line performance, it is still below average for the sector.
3. Low Gross Margin Reveals Weak Structural Profitability
In the semiconductor industry, a company’s gross profit margin is a critical metric to track because it sheds light on its pricing power, complexity of products, and ability to procure raw materials, equipment, and labor.
Photronics’s gross margin is one of the worst in the semiconductor industry, signaling it operates in a competitive market and lacks pricing power. As you can see below, it averaged a 35.7% gross margin over the last two years. Said differently, Photronics had to pay a chunky $64.33 to its suppliers for every $100 in revenue. 
Final Judgment
Photronics isn’t a terrible business, but it doesn’t pass our bar. Following the recent surge, the stock trades at 22.3× forward P/E (or $49.99 per share). While this valuation is fair, the upside isn’t great compared to the potential downside. We're pretty confident there are superior stocks to buy right now. We’d suggest looking at one of Charlie Munger’s all-time favorite businesses.
Stocks We Would Buy Instead of Photronics
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