Back to top

Image: Bigstock

3 Stocks Worth a Look From the Prospering Semiconductor Industry

Read MoreHide Full Article

The Zacks Semiconductor – Communications industry is benefiting from 5G-related growth opportunities. The increasing need for high-speed data in both communications networks and data centers bodes well for the industry participants. In addition, the growing adoption of IoTs, smartphones, storage solutions and networking, as well as strong demand for analog integrated circuits should continue to drive the industry’s growth.

Also, the demand for optical products continues to rise, driven by different factors including expanding use of cloud and increasing demand for 100GbE transceivers from operators of mega datacenters, which should continue to benefit the industry participants. Companies like Marvell Technology (MRVL - Free Report) , Nitto Denko (NDEKY - Free Report) and NeoPhotonics (NPTN - Free Report) are well positioned to benefit from these positives.

Industry Description

The Zacks Semiconductor – Communications industry primarily comprises companies that provide integrated circuits, which are used in storage, network computing and connectivity devices.

The industry participants primarily cater to end markets that constitute consumer, mobile, desktop, automotive, industrial, communications, IoT, wearable devices and others.

What’s Shaping the Future of the Semiconductor – Communications Industry?

5G Prospects are a Key Catalyst: The growing deployment of 5G holds near-term promise for the industry players as they make processors that are used in 5G base stations. Adoption of 5G beyond mobile is likely to boost demand for memory and storage, particularly in IoT devices, wireless infrastructure and data centers. Moreover, coronavirus-triggered work-from-home and learn-from-home global wave — which is bolstering demand for high-speed Internet services — bodes well for these semiconductor companies that are enhancing their 5G efforts. Given this upbeat scenario, the companies in this industry that are involved in the rollout of 5G infrastructure and smartphones are anticipated to remain on the growth trajectory, backed by strong efforts made toward bolstering 5G strength.

Increased Spending on IoT a Tailwind: IoT is fast gaining market traction amid the coronavirus pandemic as more and more enterprises turn to digital technologies for prevention as well as control of the pandemic. Also, it is advancing on the back of cloud storage and growing interconnectedness of things. Increasing use of IoT solutions in retail and transportation industries, and for the development of connected smart cities is driving growth of this industry.    

Global Business Disruptions Remain a Woe: The industry players are reeling under the impact of coronavirus-induced macroeconomic headwinds. Supply-chain issues stemming from social-distancing and shelter-in-place restrictions due to the current pandemic situation impacted these companies. It is believed that the semiconductor industry has remained resilient of the coronavirus impact so far due to substantial chip inventory available in the supply chain. However, if the coronavirus stays for a longer period, it will severely affect the supply chain and demand. The pandemic may impact the production of electronic manufacturing companies, thereby affecting demand for semiconductor chips and equipment.

Zacks Industry Rank Indicates Impressive Prospects

The Zacks Semiconductor – Communications industry is housed within the broader Zacks Computer and Technology sector. It carries a Zacks Industry Rank #72, which places it in the top 28% of more than 250 Zacks industries.

The group’s Zacks Industry Rank, which is basically the average of the Zacks Rank of all the member stocks, indicates encouraging 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.

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.

Industry Outperforms S&P 500 & Sector

The Zacks Semiconductor – Communications industry has outperformed the Zacks S&P 500 composite, as well as the broader Zacks Computer and Technology sector over the past year.

The industry has gained 60% over this period compared with the S&P 500’s rise of 16.2% and broader sector’s 35.7% rally.

One-Year Price Performance

Industry’s Current Valuation

On the basis of forward 12-month price-to-earnings ratio, which is a commonly used multiple for valuing Semiconductor – Communications stocks, the industry is currently trading at 49.91X versus the S&P 500’s 22.69X and sector’s 27.08X.

Over the past five years, the industry has traded as high as 50.78X, as low as 13.63X and recorded a median of 32.92X, as shown in the charts below.

Price-to-Earnings (P/E) Ratio (F1)

Price-to-Earnings (P/E) Ratio (F1)

3 Semiconductor – Communications Stocks to Keep a Close Eye on

Nitto Denko: The company is a producer of electrical insulating materials like adhesive tapes. It is benefiting from strong demand for OLED-related materials. The company continues to dominate high-end polarizer and Indium Tin Oxide film markets. In addition, strength in its Avecia business is a catalyst. Also, the company’s increasing demand for flexible printed circuit board products remains encouraging.

Further, this Zacks Rank #2 (Buy) firm is well positioned to grow in the medical space, owing to strong demand for nucleic acid medicine. Its partnerships with leading companies on out-licensing of drug delivery systems are expected to benefit the company going forward.

The Zacks Consensus Estimate for fiscal 2021 earnings has been revised 13.8% upward to $1.65 per share over the past 30 days.

Marvell: The company is well poised to gain from strong demand for networking products from datacenter and 5G infrastructure end markets. The huge opportunity in 5G base stations in the near future is expected to help Marvell maintain impressive momentum. Persistent deployment of 5G in Korea and higher 5G adoption in Japan and other countries are tailwinds.

Shares of Marvell have gained 64.5% in the past year. This Zacks Rank #3 (Hold) company is likely to gain from the recent deal to acquire Inphi. The deal is expected to further improve its position in the 5G wireless infrastructure market and open new opportunities. In addition, the improving storage business is a tailwind. You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

Notably, the Zacks Consensus Estimate for fiscal 2021 earnings has remained stable at 92 cents over the past 30 days.

Price and Consensus: MRVL

NeoPhotonics: The company helps to support the fast transmission of data for cloud computing, data centers and telecom networks. It is well poised to gain from strong momentum across data centers. Its optoelectronic products that transmit, receive and switch high-speed digital optical signals for communications networks are being adopted widely. In addition, accelerated deployment of 5G in China is likely to have fueled the demand for NeoPhotonics’ products.

Shares of NeoPhotonics have lost 6.6% in the past year. This Zacks Rank #3 company is likely to gain from strength in the optical market, increase in design wins, strong 400ZR+ module and 400-gigabit products, as well as recovery in China.

Notably, the Zacks Consensus Estimate for 2020 earnings has been revised 15.6% downward to 27 cents per share over the past 30 days.

Price and Consensus: NPTN

These Stocks Are Poised to Soar Past the Pandemic

The COVID-19 outbreak has shifted consumer behavior dramatically, and a handful of high-tech companies have stepped up to keep America running. Right now, investors in these companies have a shot at serious profits. For example, Zoom jumped 108.5% in less than 4 months while most other stocks were sinking.

Our research shows that 5 cutting-edge stocks could skyrocket from the exponential increase in demand for “stay at home” technologies. This could be one of the biggest buying opportunities of this decade, especially for those who get in early.

See the 5 high-tech stocks now>>

In-Depth Zacks Research for the Tickers Above

Normally $25 each - click below to receive one report FREE:

Marvell Technology, Inc. (MRVL) - free report >>

Nitto Denko Corp. (NDEKY) - free report >>

NeoPhotonics Corporation (NPTN) - free report >>