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3 Stocks to Capitalize on the Attractive Semiconductor Industry
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While supply constraints impacting some players are likely to continue through the year, the strong demand environment is leading to price increases and long-term supply agreements (for some).
The pandemic benefited the industry, which provides the building blocks of technology that everyone was relying on for maintaining social distancing and remote operations. The transition to normalcy is likely to be gradual and accompanied by even more spending. Continued shortage in the automotive industry remains one of the strongest drivers right now.
Moreover, technological advancements in the way we do computing, as well as artificial intelligence, Internet of Things, 5G, driverless cars and a host of other things that will greatly increase our reliance on the digital world are secular drivers for the industry.
Therefore, there are huge prospects in this market and it’s a place we should all be in. Our current picks are Monolithic Power Systems, ON Semiconductor and MaxLinear.
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.
The industry is cyclical and prices are elastic. Given the application of these semiconductors across automotive, communications, computing/cloud/data center, industrial, medical, IoT and other markets, these players usually serve multiple markets that offset their individual seasonal
Major Drivers
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 are leading to unprecedented demand for semiconductor chips. Since we simply aren’t making as many chips as we need and supply chain bottlenecks aren’t helping the situation, prices are going up. Company chiefs are guessing that the great chip shortage will continue through the year despite considerable effort to redirect some production and also bring new capacity online. This should support continued strength in prices.
The post-pandemic hybrid model, where more people move out of their homes more often but not all the time, is leading to continued demand in the computing market as commercial demand replaces individual demand. The flexibility to work from home becoming is something that many employers and employees want, so the expansion of the overall electronic footprint appears permanent. Consumer devices incorporating newer technologies to enable more experiences, will add to this demand. 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 will increase. Moreover, since 5G is only involved in short range signals, it will not totally replace 4G but will supplement it. So it will be additive in terms of 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 acquire of 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 what the government bears.
Zacks Industry Rank Indicates Attractive Prospects
The Zacks Semiconductor – Analog and Mixedindustry is housed within the broader Zacks Computer and Technologysector. It carries a Zacks Industry Rank #17, which places it at the top 7% 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. So 2022 estimates have risen 40.4% over the past year, while 2022 estimates have risen 12.6%.
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
The Zacks Semiconductor – Analog and Mixed industry traded higher than the broader Zacks Computer and Technology Sector as well as the S&P 500 index though much of the past year.
Overall, the industry added 5.2% to its value over the past year while the broader sector lost 18.2% and the S&P 500 5.9%.
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 16.45X, which is a discount to both the S&P 500’s 17.39X and the broader computer and technology sector’s 20.63X. At the current level, it is also well below its median level of 23.47X over the past year.
The current level of 16.45X is in fact its lowest over the past year. Its highest point over the past year was 25.30X.
Forward 12 Month Price-to-Earnings (P/E) Ratio
Image Source: Zacks Investment Research
3 Promising Stocks Offering Exposure To The Industry
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 the economy during this time. As a result, the company has seen particularly strong revenue growth from the June quarter of 2020. Its recent results reflect continued broad-based strength across end markets, particularly computing and storage (commercial notebooks), enterprise data (data center, workstation computing), communications (5G buildouts, satellite communications) and consumer (mainly IoT). Its strength is coming from the ramp up of new, higher-margin products 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 8.4% in the last quarter. Its 2022 EPS estimate has increased $1.98 (20.6%) in the last 30 days. Additionally, its 2023 estimate increased $2.51 (22.6%).
Shares of this Zacks Rank #1 (Strong Buy) stock are up 36.3% over the past year.
Price and Consensus: MPWR
Image Source: Zacks Investment Research
ON Semiconductor Corporation (ON - Free Report) : The company is an original equipment manufacturer (OEM) of a broad range of discrete and embedded semiconductor components, including power management, logic, signal processing, memory and application specific integrated circuits (ASICs). It also offers foundry services. It serves players in the automotive, industrial, medical, aerospace/defense, communications, networking, wireless, consumer and computing markets.
The company is a beneficiary of the current strength in the automotive and industrial (factory automation) markets, both of which are in the middle of a strong growth phase. Additionally, its highly differentiated power management solutions have enabled it to generate new design wins and market share gains. With auto customers entering into long-term supply agreements, the company stands to benefit from the improving visibility and better asset allocation. On Semi is also well positioned to capitalize on the ADAS and emerging EV opportunity, as well as the rapidly expanding alternative energy market (mainly solar farms).
ON Semi beat March quarter estimates by 16.2% and in the last 30 days, 2022 estimates for this Zacks Rank #1 company increased 75 cents (18.0%). The 2023 estimate increased 54 cents (12.2%).
The shares are up 50.0% over the past year.
Price and Consensus: ON
Image Source: Zacks Investment Research
MaxLinear, Inc. (MXL - Free Report) : Carlsbad, California-based MaxLinear provides radiofrequency (RF), high-performance analog, and mixed-signal communications systems-on-chip (SoCs) solutions for the connected home, wired and wireless infrastructure, and industrial and multi-market applications worldwide. Its products integrate various portions of a high-speed communication system. The product range includes broadband radio transceiver front ends, data converters, embedded systems and software architecture, and architecture and system design for highly integrated end-to-end communication platform solutions. The products are sold to electronics distributors, module makers, original equipment manufacturers (OEMs), and original design manufacturers (ODMs) through a direct sales force, third-party sales representatives, and a distributor network.
MaxLinear is seeing strong growth across its served markets on the strength of its comprehensive product portfolio and the accelerating pace of new product launches, particularly in connectivity, fiber-to-the home broadband, optical, and wireless infrastructure markets. It continues to take share in Wi-Fi and management expects this business to more than double this year and also grow very strongly in the next.
MaxLinear recently inked a deal to buy Silicon Motion technology for $114.34 per ADS ($8 billion in total for the company) in cash and stock. The acquisition will be immediately accretive and will generate $100 billion of annualized savings within eighteen months of closing the deal. It brings important NAND flash controller technology, helping to round out the product portfolio and facilitate its expansion into enterprise, consumer and other adjacent growth markets.
MaxLinear beat estimates by 9.9% in the last quarter. The Zacks Consensus Estimate for 2022 has jumped 36 cents (9.7%) in the last 30 days. The 2023 estimate jumped 43 cents (10.9%) during the same period.
#2 ranked MaxLinear’s shares are up 21.6% over the past year.
Price and Consensus: MXL
Image Source: Zacks Investment Research
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3 Stocks to Capitalize on the Attractive Semiconductor Industry
While supply constraints impacting some players are likely to continue through the year, the strong demand environment is leading to price increases and long-term supply agreements (for some).
The pandemic benefited the industry, which provides the building blocks of technology that everyone was relying on for maintaining social distancing and remote operations. The transition to normalcy is likely to be gradual and accompanied by even more spending. Continued shortage in the automotive industry remains one of the strongest drivers right now.
Moreover, technological advancements in the way we do computing, as well as artificial intelligence, Internet of Things, 5G, driverless cars and a host of other things that will greatly increase our reliance on the digital world are secular drivers for the industry.
Therefore, there are huge prospects in this market and it’s a place we should all be in. Our current picks are Monolithic Power Systems, ON Semiconductor and MaxLinear.
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.
The industry is cyclical and prices are elastic. Given the application of these semiconductors across automotive, communications, computing/cloud/data center, industrial, medical, IoT and other markets, these players usually serve multiple markets that offset their individual seasonal
Major Drivers
Zacks Industry Rank Indicates Attractive Prospects
The Zacks Semiconductor – Analog and Mixedindustry is housed within the broader Zacks Computer and Technologysector. It carries a Zacks Industry Rank #17, which places it at the top 7% 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. So 2022 estimates have risen 40.4% over the past year, while 2022 estimates have risen 12.6%.
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
The Zacks Semiconductor – Analog and Mixed industry traded higher than the broader Zacks Computer and Technology Sector as well as the S&P 500 index though much of the past year.
Overall, the industry added 5.2% to its value over the past year while the broader sector lost 18.2% and the S&P 500 5.9%.
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 16.45X, which is a discount to both the S&P 500’s 17.39X and the broader computer and technology sector’s 20.63X. At the current level, it is also well below its median level of 23.47X over the past year.
The current level of 16.45X is in fact its lowest over the past year. Its highest point over the past year was 25.30X.
Forward 12 Month Price-to-Earnings (P/E) Ratio
Image Source: Zacks Investment Research
3 Promising Stocks Offering Exposure To The Industry
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 the economy during this time. As a result, the company has seen particularly strong revenue growth from the June quarter of 2020. Its recent results reflect continued broad-based strength across end markets, particularly computing and storage (commercial notebooks), enterprise data (data center, workstation computing), communications (5G buildouts, satellite communications) and consumer (mainly IoT). Its strength is coming from the ramp up of new, higher-margin products 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 8.4% in the last quarter. Its 2022 EPS estimate has increased $1.98 (20.6%) in the last 30 days. Additionally, its 2023 estimate increased $2.51 (22.6%).
Shares of this Zacks Rank #1 (Strong Buy) stock are up 36.3% over the past year.
Price and Consensus: MPWR
Image Source: Zacks Investment Research
ON Semiconductor Corporation (ON - Free Report) : The company is an original equipment manufacturer (OEM) of a broad range of discrete and embedded semiconductor components, including power management, logic, signal processing, memory and application specific integrated circuits (ASICs). It also offers foundry services. It serves players in the automotive, industrial, medical, aerospace/defense, communications, networking, wireless, consumer and computing markets.
The company is a beneficiary of the current strength in the automotive and industrial (factory automation) markets, both of which are in the middle of a strong growth phase. Additionally, its highly differentiated power management solutions have enabled it to generate new design wins and market share gains. With auto customers entering into long-term supply agreements, the company stands to benefit from the improving visibility and better asset allocation. On Semi is also well positioned to capitalize on the ADAS and emerging EV opportunity, as well as the rapidly expanding alternative energy market (mainly solar farms).
ON Semi beat March quarter estimates by 16.2% and in the last 30 days, 2022 estimates for this Zacks Rank #1 company increased 75 cents (18.0%). The 2023 estimate increased 54 cents (12.2%).
The shares are up 50.0% over the past year.
Price and Consensus: ON
Image Source: Zacks Investment Research
MaxLinear, Inc. (MXL - Free Report) : Carlsbad, California-based MaxLinear provides radiofrequency (RF), high-performance analog, and mixed-signal communications systems-on-chip (SoCs) solutions for the connected home, wired and wireless infrastructure, and industrial and multi-market applications worldwide. Its products integrate various portions of a high-speed communication system. The product range includes broadband radio transceiver front ends, data converters, embedded systems and software architecture, and architecture and system design for highly integrated end-to-end communication platform solutions. The products are sold to electronics distributors, module makers, original equipment manufacturers (OEMs), and original design manufacturers (ODMs) through a direct sales force, third-party sales representatives, and a distributor network.
MaxLinear is seeing strong growth across its served markets on the strength of its comprehensive product portfolio and the accelerating pace of new product launches, particularly in connectivity, fiber-to-the home broadband, optical, and wireless infrastructure markets. It continues to take share in Wi-Fi and management expects this business to more than double this year and also grow very strongly in the next.
MaxLinear recently inked a deal to buy Silicon Motion technology for $114.34 per ADS ($8 billion in total for the company) in cash and stock. The acquisition will be immediately accretive and will generate $100 billion of annualized savings within eighteen months of closing the deal. It brings important NAND flash controller technology, helping to round out the product portfolio and facilitate its expansion into enterprise, consumer and other adjacent growth markets.
MaxLinear beat estimates by 9.9% in the last quarter. The Zacks Consensus Estimate for 2022 has jumped 36 cents (9.7%) in the last 30 days. The 2023 estimate jumped 43 cents (10.9%) during the same period.
#2 ranked MaxLinear’s shares are up 21.6% over the past year.
Price and Consensus: MXL
Image Source: Zacks Investment Research