The Zacks Semiconductors - Radio Frequency Industry comprises an array of companies with diversified end-markets.
The solutions provided by the key industry players apart from Radio Frequency (RF) solutions comprise Front-end Modules (FEMs), low-noise amplifiers, diodes, multi-chip modules (MMICs), optical components, surface acoustic wave (SAW) and bulk acoustic wave (BAW) filters, to mention a few.
These solutions find application in markets like aerospace and defense, 5G equipment, optical networks, cellular base stations, automotive and smart home applications.
The industry players utilize robust wafer fabrication technologies to gain a competitive edge over peers. The companies also leverage ZigBee,Bluetooth Low Energy (BLE), Thread, silicon germanium, Gallium Nitride (GaN) technologies across their portfolio to get ahead of the curve.
However, a saturated consumer electronic market, particularly the smartphone market which is sluggish and anticipated to decline this year is likely to hinder growth prospects of the industry.
Moreover, increasing U.S. protectionism is hurting growth prospects of the industry. Lack of skilled workers particularly from STEM (Science, Technology, Engineering and Mathematics) fields in the United States has been bothering industry participants for quite some time.
Further, the ongoing trade war between the United States and China has created a volatile environment that is not conducive for investments.The recently announced fresh tariffs of 10% on an additional $200 billion worth of Chinese goods only aggravates the matter.
Notably, the industry participants generate a significant portion of their revenues from China. As the direct revenue sources are now under the radar of plausible tariffs, the concern over the prospects of the industry has increased in recent times.
Additionally, volatility in foreign exchange primarily due to current macro-economic scenario and headwinds in the emerging markets does not bode well for the Zacks Semiconductors – RF Industry.
Industry Lags on Shareholder Returns
Looking at shareholder returns over the past year, it appears that the ongoing tariff war between the United States and China, and growing U.S. protectionism has been dampening investor sentiment toward the Semiconductors – RF industry.
The Zacks Semiconductors - Radio Frequency Industry, which falls within the broader Zacks Computer And Technology Sector, has witnessed an unimpressive performance against both the S&P 500 and its own sector over the past year.
While the stocks in this industry have collectively shed 11% of their value, the Zacks S&P 500 Composite and Zacks Computer And Technology Sector have rallied 18.8% and 19.5%, respectively.
One-Year Price Performance
Semiconductors - Radio Frequency Stocks Trading Cheap
Owing to the underperformance over the past year, the valuation for Zacks Semiconductors - Radio Frequency industry looks cheap at the moment. One might get a good sense of the industry’s relative valuation by looking at its price-to-earnings ratio (P/E), which essentially shows how much an investor is willing to pay for each unit of earnings.
Notably, a lower P/E ratio is always better.
The industry currently has a forward 12-month P/E ratio of 12.36X, which is below the median level and close to the lowest level over the past year.
The space also looks inexpensive when compared with the market at large, as the forward 12-month P/E ratio for the S&P 500 is 17.45X and the median level is 17.58X.
Price-to-Earnings Ratio (F12M)
Moreover, a comparison of the group’s P/E ratio with that of its broader sector ensures that the group is trading at a huge discount.
The Zacks Computer And Technology Sector’s forward 12-month P/E ratio of 19.96X, which is below the median level of 20.04X for the same period, being way above the Zacks Semiconductors - Radio Frequency industry ratio.
Price-to-Earnings Ratio (F12M)
Modest Earnings Outlook Keeps Us Cautious
Amid intensifying trade war, sluggish smartphone market and increasing foreign exchange volatility, what really matters to investors is whether this group has the potential to perform better than the broader market in the quarters ahead.
One reliable measure that can help investors understand the industry’s prospects for a solid price performance going forward is its earnings outlook. Empirical research shows that earnings outlook for the industry, a reflection of the earnings revisions trend for the constituent companies, has a direct bearing on its stock market performance.
The Price & Consensus chart for the industry shows the market's evolving bottom-up earnings expectations for it and the industry's aggregate stock market performance.
Price and Consensus: Zacks Semiconductors - Radio Frequency Industry
This becomes even clearer by focusing on the aggregate bottom-up EPS revisions trend. The chart below shows the decline in aggregate consensus expectations for 2018.
Please note that the $5.17 estimate for the industry for 2018 is not the actual bottom-up EPS estimate for every company in the Zacks Semiconductors - Radio Frequency industry, but rather an illustrative aggregate number created by our proprietary analytics model. The key factor to keep in mind is not the EPS of the industry for 2018, but how this projection has evolved recently.
As you can see here, the $5.17 per share estimate for 2018 has continued to decline from the end of August which may be primarily due to the freshly announced tariffs impacting the industry.
In other words, the sell-side analysts covering the companies in the Zacks Semiconductors - Radio Frequency industry have been pessimistic about raising their estimates.
Current Fiscal Year EPS Estimate Revisions
Zacks Industry Rank Indicates Bleak Near-Term Prospects
The group’s Zacks Industry Rank, which is basically the average of the Zacks Rank of all the member stocks, indicates underperformance in the near term.
The Zacks categorized Semiconductors - Radio Frequency industry currently carries a Zacks Industry Rank #191, which places it at the bottom 25% of 256 Zacks industries.
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.
Industry Shows Potential in the Long-Term
Robust demand for RF semiconductor products due to the rapid adoption of cloud, Internet of Things (“IoT”), wearables, drones, virtual reality/ augmented reality (“VR/AR”) devices, autonomous cars, and advanced driver assisted systems (“ADAS”) are fueling growth in the space.
Further, accelerated deployment of 5G technology is likely to spur further growth.
RF Semiconductors are setting the pace for technology modernization, consequently digitizing aspects like connectivity, healthcare, transport, defense, among others.
The long-term (3-5 years) EPS growth estimate for the Zacks Semiconductors - Radio Frequency industry appears promising. The group’s mean estimate of long-term EPS growth rate is currently 12.98%. This compares with 9.83% for the Zacks S&P 500 composite.
Mean Estimate of Long-Term EPS Growth Rate
Additionally, revenues have shown a marked improvement since December 2013. Growth can be attributed to the diversification of end markets beyond smartphones. The emergence of connected devices, 5G poises the industry well in the long haul.
Near-term growth prospect for the Zacks Semiconductors - Radio Frequency industry is cloudy given the volatility emanating from the ongoing U.S.-China trade war.
Below are two stocks that carry a bearish Zacks Rank that we would recommend investors to stay away from for the time being.
Akoustis Technologies, Inc. (AKTS - Free Report) : Huntersville, NC-based Akoustis carries a Zacks Rank #4 (Sell). The stock has returned 28.7% on a year-to-date basis. The Zacks Consensus Estimate for current-year deteriorated by 4 cents to a loss of 96 cents per share for the current year in the last 30 days.
Price and Consensus: AKTS
Resonant Inc. (RESN - Free Report) : Goleta, CA-based Resonant is a Zacks Rank #4 stock. Its shares have shed 41.1% of its value on a year-to-date basis. The Zacks Consensus Estimate for current-year EPS was revised 2.9% upward in the last 60 days to a loss of 67 cents per share.
Price and Consensus: RESN
However, Qorvo, Inc. (QRVO - Free Report) , is a Greensboro, NC-based company in the Zacks Semiconductors - Radio Frequency industry that investors can buy given its impressive growth prospects and potential for an upside. It carries a Zacks Rank #2 (Buy). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.
Shares of Qorvo have returned 15.3% year to date. Moreover, the consensus EPS estimate for the company has increased 4.4% to $6.19 for the current year, over the last 60 days.
Price and Consensus: QRVO
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