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3 Stocks To Consider in the Still-Attractive Semiconductor Industry
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The strong demand environment of the last few months has allowed several semiconductor players to enter into long-term, preferred supplier or other special relationships with customers. This has improved visibility for players and stabilized revenue streams. However, the industry remains capacity constrained, which is a limiting factor. While new fabs and capacity builds are ongoing, very high demand is expected over the next five to ten years because of the adoption of new technologies like AI-ML, EVs, smart cities, IoT, etc.
While the longer-term outlook is extremely bright, near-term concerns related to the Fed-engineered economic slowdown cannot be ruled out. The most likely result will be increased caution at customers, who could order closer to consumption, thus reducing visibility. But this should not be a deterrent considering that valuations are supportive.
Our current picks are Silicon Laboratories, Monolithic Power Systems and Microchip.
About The Industry
We generally use our electronic gadgets without thinking, expecting them to accurately read our commands, and record, store, retrieve and process the information we throw at them. The complex process that makes this possible is enabled by semiconductor technology, whether analog (enabling the recording and measurement of real-world information), digital (processing information available in machine-readable language) or mixed signal (enabling conversion of analog signals to digital or digital to analog among other things). Most electronic gadgets use a combination of these components, whether in the consumer devices referred to above or in other applications in industrial, auto, medical, communications, IoT and other markets. The industry is cyclical and prices are elastic. Players usually serve multiple markets and have highly differentiated technology, strong relationships.
Major themes for the industry:
Companies in this industry are relatively better equipped to deal with the planned slowdown in the economy that the Fed is engineering. That is because these companies are somewhat behind schedule in delivering the components for the post-pandemic rush in demand. Most players are continuing to see very strong demand although some segments are seeing orders slow down or get rescheduled, which along with the slight uptick in cancellations, points to increasing caution at customers. But many of these companies have long term agreements stretching well into 2023, which means that any softness could take longer to show up in the results.
The increasing use of electronics in vehicles, airplanes and defense equipment; increased factory automation; greater penetration of smartphones, tablets, notebooks, PCs and all manner of personal computing and other personal devices and smart household appliances; communications infrastructure moving to 5G; greater reliance on cloud infrastructure; the advent of artificial intelligence (AI), the Internet of Things (IoT), more advanced medical devices, EVs, self-driving cars etc continue to expand the addressable market for semiconductor chips. While any supply chain bottlenecks and resultant price increases are temporary, this constantly expanding addressable market makes this a very attractive industry to invest in. This is particularly true because the industry is capacity constrained based on today’s level of digitization, but this digitization is expected to increase manifold in the next few years because of the adoption of AI, EV and such other technologies.
The post-pandemic hybrid model, where more people move out of their homes more often but not all the time, is leading to an expansion of the overall electronic footprint of the consumer/computing segment. Near-term challenges here are related to strong uptake in the last couple of years. But there are other segments that offer opportunity, including the metaverse and consumer devices incorporating newer technologies to enable more experiences. The number of semiconductors per device and their complexities will also continue to increase. R&D budgets focused on responding to increased competition and the expanding scope of digitization will therefore also increase.
The adoption of 5G communications technology, enabling 10X the data rate as 4G, is another boost to analog-mixed signal sales both in base stations and end devices. Because of the multiple input (MI) and multiple output (MO) streams the technology enables in base stations, demand for sensors and power management analog including envelope tracking chips (to manage excess power flow and thus reduce heating), as well as gallium nitride (GaN) materials are increasing. Moreover, since 5G is only involved in short range signals, it is not totally replacing 4G but supplementing it, thus adding to component demand. With the economy continuing to open up and the virus looking like it’s on its way to becoming endemic, this segment should only get stronger.
Industry consolidation continues as the cost and complications of making chips rises in an environment where the adoption of semiconductors in devices of varying value requires prices to decline. Acquisitions are also driven by the need to expand R&D capabilities and to acquire key talent.
U.S. government officials worry that none of the most advanced chips are currently manufactured in the country. This is considered to be a national security concern given that semiconductors are playing an increasingly larger role in AI-driven electronic weaponry and surveillance mechanisms. So the government is trying to incentivize companies to build in the U.S. TSM, the main supplier to the U.S. is setting up in the country but the plan is to have this on a much larger scale. How exactly this situation will play out for the industry is unknown. Increasing capacity would depress prices. And U.S. production would increase cost. So much depends on the government’s contribution (perhaps through the CHIPS Act).
Zacks Industry Rank Indicates Attractive Prospects
The Zacks Semiconductor – Analog and Mixed industry is housed within the broader Zacks Computer and Technology sector. It carries a Zacks Industry Rank #82, which places it at the top 33% of more than 250 Zacks-classified industries.
The group’s Zacks Industry Rank, which is basically the average of the Zacks Rank of all the member stocks, indicates attractive near-term prospects. Our research shows that the top 50% of the Zacks-ranked industries outperforms the bottom 50% by a factor of more than 2 to 1.
The industry’s positioning in the top 50% of the Zacks-ranked industries is a result of positive earnings outlook for the constituent companies in aggregate. Looking at the aggregate earnings estimate revisions over the past year, it is clear that analysts are optimistic about this group’s earnings growth potential. As a result, 2022 estimates have risen 39.9% over the past year, while 2023 estimates have risen 2.5%.
Before we present a few stocks that you may want to consider for your portfolio, let’s take a look at the industry’s recent stock-market performance and valuation picture.
Stock Market Performance Is Attractive
Since October of last year, the Zacks Semiconductor – Analog and Mixed industry has traded at a premium to the broader Zacks Computer and Technology Sector. It has also traded at a premium to the S&P 500 though much of this period.
Overall, the industry lost 7.4% of its value over the past year while the broader sector lost 27.6% and the S&P 500 lost 10.2%.
One-Year Price Performance
Image Source: Zacks Investment Research
Industry's Current Valuation
On the basis of forward 12-month price-to-earnings (P/E) ratio, the industry is trading at a 15.57X multiple, which is a discount to both the S&P 500’s 17.52X and the broader computer and technology sector’s 21.29X. At the current level, it is also trading below its median level of 18.51X over the past year.
The current P/E of 15.57X is between its lowest point of 13.91X and highest point of 24.39X over the past year.
Forward 12 Month Price-to-Earnings (P/E) Ratio
Image Source: Zacks Investment Research
3 Promising Stocks Offering Exposure to the Industry
Silicon Laboratories Inc. (SLAB - Free Report) : A fabless semiconductor company, Silicon Laboratories provides various analog-intensive mixed-signal products like wireless microcontrollers and sensors mainly in the U.S. and China. They find application across a broad range of end markets such as the Internet of Things (IoT), industrial automation and control, smart metering, smart lighting, commercial building automation, consumer electronics, asset tracking and medical instrumentation.
The company is a beneficiary of ongoing strength in industrial, commercial and smart city applications, as well as its extremely broad customer base. The breadth of its customers across markets and regions offers greater stability during economic upheavals. While there was some channel inventory buildup during the quarter, management said that it was because of the shutdowns in China. Overall, the America business was very strong, as was Europe while Asia was impacted by the softness in China.
Silicon Laboratories beat June quarter estimates by 28.6% and in the last 60 days, the 2022 estimates for this Zacks Rank #1 (Strong Buy) company increased 75 cents (20.5%). The 2023 estimate increased 61 cents (14.6%).
The shares are down 11.0% over the past year.
Price and Consensus: SLAB
Image Source: Zacks Investment Research
Monolithic Power Systems, Inc. (MPWR - Free Report) : The company designs, develops, and markets integrated power semiconductor solutions and power delivery architectures for computing and storage, automotive, industrial, communication and consumer applications markets.
Monolithic Power has not seen any negative impact from the pandemic at all. In fact, being a semiconductor company, it has been one of the enablers of the digital economy that supported regular operations during this time. As a result, the company has seen particularly strong revenue growth from the June quarter of 2020.
Its recent results benefited from the broad range of end markets that it caters to and reflect continued broad-based strength across these end markets, including enterprise data (data center and workstation computing), computing and storage (commercial notebooks and storage), consumer (broad-based but home appliances and gaming were particularly strong), industrial (mainly power source and security) and auto (strength was in ADAS, digital cockpit and lighting). The results are driven by the ramp up of new, higher-margin products and long-term customer relationships, which are not only driving share gains, but also generating strong margins.
Monolithic Power topped the Zacks Consensus earnings estimate by 10.5% in the last quarter. Its 2022 EPS estimate has increased 95 cents (8.2%) in the last 60 days. Additionally, its 2023 estimate increased 72 cents (5.3%). While estimates are still moving up, the magnitude of increase has reduced significantly because of the growing uncertainty.
Shares of this Zacks Rank #2 (Buy) stock are down 8.6% over the past year.
Price and Consensus: MPWR
Image Source: Zacks Investment Research
Microchip Technology Incorporated (MCHP - Free Report) : Microchip Technology Incorporated operates in the Americas, Europe and Asia. It develops, manufactures and sells smart, connected, and secure embedded control solutions such as general purpose 8-bit, 16-bit, and 32-bit microcontrollers; 32-bit embedded microprocessors; and specialized microcontrollers for automotive, industrial, computing, communications, lighting, power supplies, motor control, human machine interface, security, wired connectivity, and wireless connectivity applications.
Microchip is a bit capacity constrained and despite capacity improvements in the last quarter, management continued to say that demand far outpaces its ability to supply. Additionally, more than 50% of its backlog is non-cancellable under its Preferred Supply Program (PSP), which greatly improves visibility. Management attributed the strong demand the company is seeing to its Total Systems Solutions strategy. Investors would also be interested to know that its strong cash flows have enabled the company to pay down a substantial portion of its debt over the last few years and also paya consistent dividend. In the last quarter, the board announced a 37.8% increase in the dividend.
Microchip beat estimates by 2.2% in the last quarter. The Zacks Consensus Estimate for 2022 has increased 25 cents (4.6%) in the last 60 days. The 2023 estimate increased 14 cents (2.5%) during the same period.
#3 (Hold) ranked Microchip’s shares are down 16.6% over the past year.
Price and Consensus: MCHP
Image Source: Zacks Investment Research
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3 Stocks To Consider in the Still-Attractive Semiconductor Industry
The strong demand environment of the last few months has allowed several semiconductor players to enter into long-term, preferred supplier or other special relationships with customers. This has improved visibility for players and stabilized revenue streams. However, the industry remains capacity constrained, which is a limiting factor. While new fabs and capacity builds are ongoing, very high demand is expected over the next five to ten years because of the adoption of new technologies like AI-ML, EVs, smart cities, IoT, etc.
While the longer-term outlook is extremely bright, near-term concerns related to the Fed-engineered economic slowdown cannot be ruled out. The most likely result will be increased caution at customers, who could order closer to consumption, thus reducing visibility. But this should not be a deterrent considering that valuations are supportive.
Our current picks are Silicon Laboratories, Monolithic Power Systems and Microchip.
About The Industry
We generally use our electronic gadgets without thinking, expecting them to accurately read our commands, and record, store, retrieve and process the information we throw at them. The complex process that makes this possible is enabled by semiconductor technology, whether analog (enabling the recording and measurement of real-world information), digital (processing information available in machine-readable language) or mixed signal (enabling conversion of analog signals to digital or digital to analog among other things). Most electronic gadgets use a combination of these components, whether in the consumer devices referred to above or in other applications in industrial, auto, medical, communications, IoT and other markets. The industry is cyclical and prices are elastic. Players usually serve multiple markets and have highly differentiated technology, strong relationships.
Major themes for the industry:
Zacks Industry Rank Indicates Attractive Prospects
The Zacks Semiconductor – Analog and Mixed industry is housed within the broader Zacks Computer and Technology sector. It carries a Zacks Industry Rank #82, which places it at the top 33% of more than 250 Zacks-classified industries.
The group’s Zacks Industry Rank, which is basically the average of the Zacks Rank of all the member stocks, indicates attractive near-term prospects. Our research shows that the top 50% of the Zacks-ranked industries outperforms the bottom 50% by a factor of more than 2 to 1.
The industry’s positioning in the top 50% of the Zacks-ranked industries is a result of positive earnings outlook for the constituent companies in aggregate. Looking at the aggregate earnings estimate revisions over the past year, it is clear that analysts are optimistic about this group’s earnings growth potential. As a result, 2022 estimates have risen 39.9% over the past year, while 2023 estimates have risen 2.5%.
Before we present a few stocks that you may want to consider for your portfolio, let’s take a look at the industry’s recent stock-market performance and valuation picture.
Stock Market Performance Is Attractive
Since October of last year, the Zacks Semiconductor – Analog and Mixed industry has traded at a premium to the broader Zacks Computer and Technology Sector. It has also traded at a premium to the S&P 500 though much of this period.
Overall, the industry lost 7.4% of its value over the past year while the broader sector lost 27.6% and the S&P 500 lost 10.2%.
One-Year Price Performance
Image Source: Zacks Investment Research
Industry's Current Valuation
On the basis of forward 12-month price-to-earnings (P/E) ratio, the industry is trading at a 15.57X multiple, which is a discount to both the S&P 500’s 17.52X and the broader computer and technology sector’s 21.29X. At the current level, it is also trading below its median level of 18.51X over the past year.
The current P/E of 15.57X is between its lowest point of 13.91X and highest point of 24.39X over the past year.
Forward 12 Month Price-to-Earnings (P/E) Ratio
Image Source: Zacks Investment Research
3 Promising Stocks Offering Exposure to the Industry
Silicon Laboratories Inc. (SLAB - Free Report) : A fabless semiconductor company, Silicon Laboratories provides various analog-intensive mixed-signal products like wireless microcontrollers and sensors mainly in the U.S. and China. They find application across a broad range of end markets such as the Internet of Things (IoT), industrial automation and control, smart metering, smart lighting, commercial building automation, consumer electronics, asset tracking and medical instrumentation.
The company is a beneficiary of ongoing strength in industrial, commercial and smart city applications, as well as its extremely broad customer base. The breadth of its customers across markets and regions offers greater stability during economic upheavals. While there was some channel inventory buildup during the quarter, management said that it was because of the shutdowns in China. Overall, the America business was very strong, as was Europe while Asia was impacted by the softness in China.
Silicon Laboratories beat June quarter estimates by 28.6% and in the last 60 days, the 2022 estimates for this Zacks Rank #1 (Strong Buy) company increased 75 cents (20.5%). The 2023 estimate increased 61 cents (14.6%).
The shares are down 11.0% over the past year.
Price and Consensus: SLAB
Image Source: Zacks Investment Research
Monolithic Power Systems, Inc. (MPWR - Free Report) : The company designs, develops, and markets integrated power semiconductor solutions and power delivery architectures for computing and storage, automotive, industrial, communication and consumer applications markets.
Monolithic Power has not seen any negative impact from the pandemic at all. In fact, being a semiconductor company, it has been one of the enablers of the digital economy that supported regular operations during this time. As a result, the company has seen particularly strong revenue growth from the June quarter of 2020.
Its recent results benefited from the broad range of end markets that it caters to and reflect continued broad-based strength across these end markets, including enterprise data (data center and workstation computing), computing and storage (commercial notebooks and storage), consumer (broad-based but home appliances and gaming were particularly strong), industrial (mainly power source and security) and auto (strength was in ADAS, digital cockpit and lighting). The results are driven by the ramp up of new, higher-margin products and long-term customer relationships, which are not only driving share gains, but also generating strong margins.
Monolithic Power topped the Zacks Consensus earnings estimate by 10.5% in the last quarter. Its 2022 EPS estimate has increased 95 cents (8.2%) in the last 60 days. Additionally, its 2023 estimate increased 72 cents (5.3%). While estimates are still moving up, the magnitude of increase has reduced significantly because of the growing uncertainty.
Shares of this Zacks Rank #2 (Buy) stock are down 8.6% over the past year.
Price and Consensus: MPWR
Image Source: Zacks Investment Research
Microchip Technology Incorporated (MCHP - Free Report) : Microchip Technology Incorporated operates in the Americas, Europe and Asia. It develops, manufactures and sells smart, connected, and secure embedded control solutions such as general purpose 8-bit, 16-bit, and 32-bit microcontrollers; 32-bit embedded microprocessors; and specialized microcontrollers for automotive, industrial, computing, communications, lighting, power supplies, motor control, human machine interface, security, wired connectivity, and wireless connectivity applications.
Microchip is a bit capacity constrained and despite capacity improvements in the last quarter, management continued to say that demand far outpaces its ability to supply. Additionally, more than 50% of its backlog is non-cancellable under its Preferred Supply Program (PSP), which greatly improves visibility. Management attributed the strong demand the company is seeing to its Total Systems Solutions strategy. Investors would also be interested to know that its strong cash flows have enabled the company to pay down a substantial portion of its debt over the last few years and also paya consistent dividend. In the last quarter, the board announced a 37.8% increase in the dividend.
Microchip beat estimates by 2.2% in the last quarter. The Zacks Consensus Estimate for 2022 has increased 25 cents (4.6%) in the last 60 days. The 2023 estimate increased 14 cents (2.5%) during the same period.
#3 (Hold) ranked Microchip’s shares are down 16.6% over the past year.
Price and Consensus: MCHP
Image Source: Zacks Investment Research