Companies in the Semiconductor – General industry are at the forefront of the ongoing technological revolution based on HPC, AI, automated driving, IoT and so on. These semiconductors also enable the cloud to function and help analyze the data into actionable insights that can be used by companies to operate more efficiently.
If anything, the pandemic has strengthened the conviction that these technological changes are required and inevitable, because it is these technology platforms that enabled us to function when it was unsafe for us to go to work or meet people. Even with the opening up of the economy, the race to digitization, cloud, AI, etc. is expected to continue at an accelerated rate, driving strong demand for semiconductors. NVIDIA has pioneered and built a whole lot of this cutting-edge technology, so it remains a top recommendation. STMicroelectronics and Screen Holdings are seeing some momentum now. About The Industry
The companies grouped under the Semiconductor – General category produce a broad range of semiconductor devices, both integrated and discrete, like microprocessors, graphics processors, embedded processors, chipsets, motherboards, wireless and wired connectivity products, DLPs and analog, serving multiple end markets. The industry includes companies like NVIDIA, Texas Instruments, Intel and STMicroelectronics.
According to the latest data from the Semiconductor Industry Association (SIA), semiconductor sales in the second quarter of 2021 grew 29.2% year over year, stronger than the 17.8% in March. All regions grew faster than in Q1, with Europe up 43.2%, Asia Pacific/All Other 34.0%, China 28.3%, the Americas 22.9% and Japan 21.2%. TheSIA/WSTS full-year forecast was raised from 8.4% to 19.7%, to be followed by 8.8% growth in 2022.
Major Themes Shaping the Industry
Being on the building-block side of technology, the industry stands to benefit from the proliferation of the Internet and the growing digitization of our lives, irrespective of the direction we move in the future. So, if the change in the way we are doing things during the pandemic attains even partial perpetuation, it will have a profound impact on the semiconductor industry. Smartphones and PCs are still the biggest consumers of chips. IDC expects smartphone shipments to grow 7.4% in 2021 (previous 5.5%), with India, Japan, the Middle East and Africa fueling the recovery, 5G upgrades and relatively healthy inventory. 5G will be 54.1% of total volumes shipped by the end of 2022. Gartner expects 11.4% growth in 2021, up from previous estimate of 3.3% growth, with 5G accounting for 35%. The PC market grew 13.2% in the second quarter, a sharp drop from the 55.9% growth in the first quarter, partly because of notebook supply constraints and signs of consumer demand slowing down even as enterprise demand picks back up. IDC lowered its PC market projections from 18% to 14.2% because of supply chain and logistical challenges. But other segments are gaining in importance. AI for instance should grow strongly (MarketsandMarkets expects a 39.7% CAGR between 2021 and 2026, from $58.3 billion to $309.6 billion). In IoT, which is still evolving, Mordor Intelligence expects a 10.53% CAGR between 2021 and 2026 from $761.4 billion to $1,386.1 billion. Automotive electronics is another area of evolving needs and strong growth potential (Grand View Research estimates a 7.9% CAGR in 2021-2028, driven mainly by various safety systems. Moreover, cost of electronic components in automobiles are expected to jump from 35% of total vehicle cost to 50% by 2030. Automation and robotics, with increasing adoption across industrial operations, are other areas of growth. The strong end markets will drive continued demand for semiconductor suppliers for years to come.
Because of the growth potential in emerging markets, regulatory (and/or political) issues in China and the U.S., can play an increasingly important role. The government’s strong stance against prime trading partner China has cast a shadow over the space. Semiconductor companies in particular stand to benefit from a truce between the U.S. and China as the Chinese government’s drive to build its own industry requires collaborations with leading semiconductor players. Moreover, commercial sales to China would help fund costly R&D in the U.S. The government is more concerned about IP protection and is trying to delay as far as possible, China’s own technological maturity. Be that as it may, the $52 billion infusion from the government (if the CHIPS Act is adopted) will be a big boost to the domestic semiconductor market.
Because end devices have to be priced lower to reach more people, the pressure on companies to bring down cost remains. But although companies will find it advantageous to move operations to places where labor may be cheaper or the proximity to manufacturing facilities can lower transportation and other cost, the government’s focus on boosting domestic production will impact decisions. Industry consolidation should continue however, as larger players add expertise and capacity through acquisitions. There’s also likely to be close collaboration with device makers, facilitating quicker consumption and better inventory management. Zacks Industry Rank Indicates Improving Prospects
Semiconductor-General Industry is a stock group within the broader Zacks Computer and Technology Sector. It carries a Zacks Industry Rank #56, which places it in the top 22% of more than 250 Zacks industries.
Zacks Industry Rank, which is basically the average of the Zacks Rank of all the member stocks, indicates positive 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.
An industry’s positioning in the top 50% of the Zacks-ranked industries is normally because the earnings outlook for the constituent companies in aggregate is encouraging. In this case, while the 2021 estimates remain on an upward trend from pre-pandemic levels, the 2022 estimate remains below this level, indicating a correction in demand or cost increases. Looking at the aggregate earnings estimate revisions, it appears that analysts are positive about the industry’s growth prospects. As a result, the aggregate earnings estimate for 2021 has grown 19.2% over the past year while the estimate for 2022 dropped 13.2%.
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 Leads on Stock Market Performance
Tracking the performance of the Zacks Semiconductor – General Industry over the past year shows that the industry has mostly traded between the broader Zacks Computer and Technology Sector (on the higher side) and the S&P 500 index (on the lower side), although it has moved higher or lower than both at times.
The industry gained 47.0% over the past year compared to the 41.2% gain of the broader sector and the 32.7% gain of the S&P 500 index.
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, which is a commonly used multiple for valuing semiconductor companies, we see that the industry is currently trading at 26.87X, which is the highest level achieved in the past year, and above the S&P 500’s 21.48X and the sector’s forward-12-month P/E of 28.34X.
Over the last five years, the industry has traded as high as 26.87X, as low as 12.86X and at the median of 17.27X, as the chart below shows.
Forward 12 Month Price-to-Earnings (P/E) Ratio
Image Source: Zacks Investment Research 3 Stocks Worth Considering
NVIDIA Corp (: NVIDIA Corporation is the worldwide leader in visual computing technologies and the inventor of the graphic processing unit, or GPU. As the GPU’s parallel processing capabilities were increasingly found to be even more effective for complex computing applications, the company saw its addressable market expand. Today, it is these chips that drive the high performance computations in not only gaming but also in a variety of other applications like artificial intelligence and virtual reality. Considering the scope of application and the fact that these are all at the cutting edge of technology, the company should see sustained growth for years to come. NVDA Quick Quote NVDA - Free Report)
After acquiring Mellanox for $7 billion earlier this year, the company has cemented its competitive moat against Intel in AI and HPC, the two most happening areas with the greatest growth potential. So it is now even better positioned for growth.
Second quarter results topped the Zacks Consensus Estimate by 3.0%. The current year EPS estimate of this Zacks Rank #2 (Buy) stock increased 24 cents (6.1%) in the last 30 days.
The shares are up 70.5% over the past year.
One-Year Performance: NVDA
Image Source: Zacks Investment Research
STMicroelectronics N.V. (STM): The company designs, develops, manufactures and markets a broad range of semiconductor integrated circuits and discrete devices used in a wide variety of microelectronic applications, including telecommunications systems, computer systems, consumer products, automotive products and industrial automation and control systems.
The company is currently seeing very strong demand across most product lines and end markets, which is leading to strong pricing and allowing it to operate at full capacity. Both these factors, in addition to manufacturing efficiencies and a better product mix led to strong profitability in its last-completed quarter. Its exposure to the automotive end market (where demand remains above planned capacity expansion) and industrial markets makes this stock a particularly attractive one at this point. Its silicon carbide wafer fabrication plans also remain on track with the first 200mm batch manufactured in Sweden (it has now added a backend manufacturing unit for this product line in Bouskoura, Morocco, which adds to existing capacity in Shenzhen, China.
STM beat the Zacks Consensus Estimate for the second quarter by 15.8%. In the last 60 days, the current year EPS estimate of this Zacks Rank #2 (Buy) stock increased 16 cents (9.1%).
The shares of the company are up 44.6% over the past year.
One-Year Performance: STM
Image Source: Zacks Investment Research Screen Holdings Co., Ltd (: Screen Holdings develops, manufactures, sells and maintains a broad range of semiconductor production equipment in Japan, Taiwan, South Korea, China, the U.S. and Europe. DINRF Quick Quote DINRF - Free Report)
Since the company is a supplier into the semiconductor market, which is seeing unprecedented demand at this point of time, Screen Holdings’ results continue to improve. However, there remains some uncertainty in the domestic (Japanese) market, where COVID infections have created havoc.
At the moment, demand isn’t quite the issue for this company, which is seeing steady capital expenditure from foundry and memory manufacturers, driven by strength in the data center, 5G, AI and IoT technologies, as well as the broad-based digital transformation to remote working and schooling.
So in its fiscal first quarter ending June, the company topped the Zacks Consensus Estimate by 1.7%. Its current year estimates have increased 44 cents (7.9%) in the last 60 days.
Shares of this Zacks Rank #2 company are up 162.1%.
One-Year Performance: DINRF
Image Source: Zacks Investment Research