There are more than a few signs of life in the semiconductor world these days. The real question, though, is when the fabs and OEMs feel enough confidence to start ordering significant amounts of equipment again. As more of a "when" question than an "if" question, patient and risk-tolerant investors can yet hope to see more growth and gains in Advanced Energy Industries (Nasdaq:AEIS).

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A Tough, but as Expected, Fourth Quarter
Business is definitely challenging these days for AEIS, but not really any more so than the company had led investors to expect. Revenue dropped 24% this quarter relative to last year and 12% relative to the third quarter, as ongoing weakness in the thin film business (down 30% sequentially) offset 12% growth in inverters.

Profitability is not strong right now either. Gross margin continues to slide; down nine points from last year and more than three points from the third quarter. While the company did report an operating profit after backing out restructuring charges, the year on year and sequential drops were pretty substantial nonetheless. (For related reading on gross margin, see Analyzing Operating Margins.)

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It's All About Location
There was a time, not all that long ago, when thin film products were about three-quarters of the revenue base. Weakness in the semiconductor equipment and flat panel industries has definitely sapped this business. Just consider the fact that Applied Materials (Nasdaq:AMAT) is a major customer of AEIS and you can see the problem.

It may be surprising to hear that AEIS is actually seeing good growth in its solar business. Isn't solar a lousy business now, with companies like First Solar (Nasdaq:FSLR) and SunTech (NYSE:STP) in the dumps? Well, here's the thing - many solar panel companies are languishing from a panel glut and major weakness in European markets caused by the end of government subsidies.

AEIS has concentrated more on the U.S. and North American markets, though, and these have been showing reasonable growth. Moreover, the company has actually been building share on the likes of Power-One (Nasdaq:PWER) and SMA Solar, and seems to hold about 30% of the market.

Restructuring That Actually Seems Real
It seems like quite a few businesses are in perpetual states of restructuring, using charges and vague discussions of cost-saving maneuvers to wave away below-peer performance. That doesn't seem to be the case at AEIS. Real moves like relocating and consolidating manufacturing facilities should pay off down the road.


Growth and Competition
Although the semiconductor and flat panel markets will be major drivers for the near term, management is looking to move the company's technology into other markets like medical and industrial power. This will be a multi-year effort, but one well worth making.

It'll also be interesting to see how the competitive dynamic may change. Companies like MKS Instruments (Nasdaq:MKSI) are already competitors in the thin film power conversion market, while well-known European names like Schneider and Siemens (NYSE:SI) play in the inverter space. It's worth wondering, though, if companies like ABB (NYSE:ABB), Eaton (NYSE:ETN) and Emerson (NYSE:EMR) move into some of these markets over time - whether through competitive internal product development or acquisition. (For related reading, see Key Players In Mergers And Acquisitions.)

The Bottom Line
AEIS was a very interesting stock in the single-digits and it has enjoyed the same late 2011/early 2012 rally as many other companies exposed to the chip sector. That's not to say that the run is over for these shares. Ongoing growth in the inverter market and a recovery in the thin film business could push these shares into the mid-teens and the stock is still worth consideration as a buy.

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At the time of writing, Stephen Simpson did not own shares in any of the companies mentioned in this article.