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3 Top Stocks From the Prospering Semiconductor Industry

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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 this industry. In addition, the growing adoption of IoTs, smartphones, storage solutions and networking should continue to aid the industry.

Also, the demand for optical products is rising, driven by different factors including expanding use of cloud and increasing demand for 100GbE transceivers, which should continue to benefit the industry participants. Companies like Marvell Technology (MRVL - Free Report) , Nitto Denko (NDEKY - Free Report) and DSP Group, Inc. are well positioned to benefit.

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 manufacture processors that are used in 5G base stations. 5G adoption beyond mobile is likely to boost demand for memory and storage, particularly in IoT devices, wireless infrastructure and data centers. Moreover, the 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. 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 affected these companies. It is believed that the semiconductor industry has remained mostly immune to 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 might hurt 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 #38, which places it at the top 15% 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 the 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 106.9% over this period compared with the S&P 500’s rise of 59.1% and broader sector’s 72.3% rally.

One-Year Price Performance

Industry’s Current Valuation

On the basis of forward 12-month price to earnings, which is a commonly used multiple for valuing Semiconductor – Communications stocks, the industry is currently trading at 44.64X versus the S&P 500’s 22.02X and sector’s 26.41X.

Over the past five years, the industry has traded as high as 57X, as low as 13.63X and recorded a median of 34.43X, 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 increasing demand for flexible printed circuit board products is encouraging.

Shares of Nitto Denko have gained 93.5% in the past year. Further, this Zacks Rank #1 (Strong 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 stable at $2.01 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 its impressive momentum. Consistent deployment of 5G in Korea and higher 5G adoption in Japan and other countries are tailwinds.

Shares of Marvell have gained 109.5% 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 stocks here.

The Zacks Consensus Estimate for fiscal 2022 earnings has been revised 0.7% upward to $1.37 per share over the past 30 days.

Price and Consensus: MRVL

DSP Group, Inc.: The company is well poised to gain from digitally transformed world as evidenced by the accelerating demand for work from home products, including remote collaboration tools, cordless phones, voice AI and IoT devices. In addition, the company has been witnessing solid end-market demand across different businesses, which is a big positive.

Shares of DSP Group have gained 22.7% in the past year. This Zacks Rank #3 company is likely to gain from strength in the SmartVoice franchise with design wins and product launches for voice user interfaces.

The Zacks Consensus Estimate for 2021 earnings has remained stable at 23 cents per share over the past 30 days.

Price and Consensus: DSPG

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In-Depth Zacks Research for the Tickers Above

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

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