Buying the Dip in Semiconductor Testing Amid ASML's Uncertainty

The semiconductor sector has faced heightened volatility in recent weeks, driven by ASML Holding's (ASML) cautious outlook for 2026 and geopolitical tensions. While ASML's stock dropped 16% following its Q2 results, the broader sector's reaction may have overestimated risks. Amid this uncertainty, two key players—Amkor Technology (AMKR) and Teradyne (TER)—present compelling contrarian opportunities. Both companies benefit from secular tailwinds in AI-driven chip demand and are undervalued relative to their growth prospects. Here's why investors should consider buying the dip.

ASML's Caution: Overreacting to Near-Term Risks?

ASML's Q2 results were strong: net sales hit €7.7 billion, gross margins expanded to 53.7%, and bookings surged to €5.5 billion. However, management warned of 2026 uncertainty due to U.S.-China trade conflicts, tariffs, and delayed semiconductor node transitions. While these risks are valid, the market's 16% sell-off may have overdiscounted the sector's long-term health.

The semiconductor industry is bifurcated: AI-driven segments like advanced packaging and testing remain robust, while legacy segments face overcapacity. Amkor and Teradyne operate in the former, positioning them to thrive despite macro headwinds.

Amkor: Resilient Packaging Leader at a Discount

Amkor is a leading outsourced semiconductor assembly and test (OSAT) provider, critical for advanced packaging used in AI chips. Despite Q2 revenue guidance of $1.375–1.475 billion (a slight sequential dip), the company benefits from secular trends:

1. AI Demand Growth: Advanced packaging, which Amkor specializes in, is essential for 3D ICs and chiplets used in AI accelerators.
2. Reshoring Tailwinds: The U.S. CHIPS Act and Taiwan's dominance in foundry capacity (Amkor's Taiwan revenue rose to 35% in Q2) drive long-term demand.
3. Undervalued Metrics:
4. Forward P/E: 18.56, below the semiconductor industry average of 28.25.
5. Price/Sales: 0.74x vs. peers at 3.02x.

Amkor's stock dropped 2.47% on ASML's earnings day but still rose 9.9% month-to-date. Analysts anticipate a Q2 EPS of $0.16 (down 40.7% YoY), but this reflects cyclical softness, not structural issues. The company's ROCE stagnation (7.3%) raises concerns, but capital investments ($850 million annually) aim to boost efficiency.

Why Buy the Dip?

• Sector Mispricing: The market is overemphasizing near-term risks like China-Taiwan tensions, while ignoring Amkor's ~22% revenue growth in the automotive/industrial segment (Q1 2025).
• Catalysts Ahead: Q2 results on July 28 and potential upside from AI partnerships could revalue the stock.

Teradyne: The Undervalued Leader in AI Testing

Teradyne, a pioneer in semiconductor test equipment, is trading at a 25.9x P/E—30% below its peers. Its Semi Test division (75% of revenue) is vital for AI chip verification, with its Titan HP system seeing 350% YoY growth in late 2024. Key points:

1. Market Dominance: Controls ~50% of the compute Verification IP (VIP) testing market, critical for AI chips.
2. Margin Resilience: Non-GAAP gross margins of 60.6% in Q1 2025 reflect pricing power in high-margin segments.
3. Valuation Discounts:
4. EV/EBITDA: 14.5x NTM (vs. 31.1x for rival Advantest).
5. DCF Fair Value: $98.07 vs. current price of $93.03.

The Robotics division's 18% YoY sales growth in Q1 2025 signals turnaround progress, despite a $22 million operating loss. Risks like U.S.-China tariffs are mitigated by global diversification and minimal DRAM exposure.

Why Buy the Dip?

• Mispriced Growth: Analysts project 16.7% revenue growth for 2025, but the stock trades at a 1.5x PEG ratio—fair for its growth profile.
• Catalysts Ahead: Q2 results (July 29) could surprise on Semi Test revenue ($680 million guidance) and Robotics breakeven progress.

Contrarian Play: Why Both Stocks Offer Asymmetric Risk/Reward

Both Amkor and Teradyne are integral to the AI chip supply chain, a $54 billion TAM growing at 15% annually. Their valuations reflect near-term macro risks but ignore:
- AI's Insatiable Demand: Chipmakers like TSMC and Intel are ramping advanced nodes (e.g., 3nm) to meet AI compute needs.
- Geopolitical Diversification: Amkor's Taiwan focus and Teradyne's global customer base reduce China-related exposure.

Investment Thesis

• Amkor (AMKR): Buy below $22/share. Target $28–$30 (30–40% upside) by year-end, assuming Q2 results beat low-end guidance.
• Teradyne (TER): Accumulate below $95/share. Target $100–$110 (5–18% upside) as Semi Test growth and Robotics recovery take hold.

Final Word

The semiconductor sector's volatility is overdone. Amkor and Teradyne are undervalued leaders in AI-driven niches with resilient fundamentals. As ASML's caution fades from headlines, these stocks could rebound sharply. For contrarian investors, now is the time to dip.

Note: Always conduct further research and consult a financial advisor before making investment decisions.