Supply-chain disruptions and end-market dynamics across the world, owing to the ongoing pandemic, have affected the Zacks
Electronics - Semiconductors industry. Macro-economic headwinds, geo-political tensions and rising inflationary pressure are weighing heavily on the industry’s prospects. Nevertheless, industry players like GlobalFoundries ( GFS Quick Quote GFS - Free Report) , ASE Technology ( ASX Quick Quote ASX - Free Report) , Lattice Semiconductor ( LSCC Quick Quote LSCC - Free Report) and Cirrus Logic ( CRUS Quick Quote CRUS - Free Report) have been benefiting from the increasing demand for high-volume consumer electronic devices such as digital media players, smartphones and tablets, and the strong uptake of efficient packaging, machine vision solutions and robotics. Additionally, the growing proliferation of AI, Machine Learning (ML), Blockchain, Internet of Things (IoT), Augmented Reality/Virtual Reality (AR/VR) and industrial revolution 4.0 (which focuses on interconnectivity and automation) should continue to drive the industry’s growth. Industry Description
The Zacks Electronics – Semiconductors industry primarily comprises companies that provide a wide range of semiconductor technologies. Their offerings include packaging and test services, wafer cleaning, factory automation, face detection, and image-recognition capabilities to develop smart and connected products. The industry participants primarily cater to end-markets constituting consumer electronics, communications, computing, industrial and automotive. Notably, the companies are increasing their spending on research and development in order to stay afloat amid technological advancements and changing industry standards. The underlined industry is experiencing solid demand for advanced electronic equipment, helping its participants increase their investments in cost-effective process technologies.
What's Shaping the Future of the Electronics - Semiconductors Industry?
The industry players are reeling under the coronavirus-induced macroeconomic woes. Supply chains have been disrupted by the social-distancing and shelter-in-place measures, owing to the pandemic, which, in turn, has severely impacted the industry participants. Although economies are gradually reopening in several parts of the world, production delays remain a major concern. The pandemic has aggravated the concerns related to the economic downturn, which continues to wreak havoc on new bookings of the industry players. Increasing health risks and deaths related to the coronavirus outbreak have made people more apprehensive about further disruptions, which, in turn, are affecting their spending patterns. Supply-Chain Disruptions Remain Worrisome: The Coronavirus outbreak-induced labor shortages are continuously impacting the production capacity of electronic companies. The companies are struggling to meet the rising demand due to the reopening of economies, owing to worker absenteeism and short-term shutdowns. The shortage of labor is dampening the growth prospects of the industry participants by increasing their lead times. Labor Shortages are Concerning:
The growing deployment of 5G holds near-term prospects for the industry players. An uptick in demand for 5G test solutions required for 5G deployment is another major positive. The growing number of high-speed data centers worldwide, which require ultra-fast internet 5G promises to deliver, is another tailwind. Increased connectivity and technology use in consumer electronics through IoT, AI, robotics, AR/VR, and others further set the demand for 5G. Given the upbeat scenario, the industry is anticipated to remain on the growth trajectory, backed by efforts to strengthen 5G. 5G Prospects are Key Catalysts: The increasing demand for miniaturization, greater functionality, lower power consumption, and improved thermal, as well as electrical performance, is driving semiconductor packaging and test technologies. The growing requirement for advanced packaging is gaining traction in the semiconductor industry, which is a key catalyst for the industry participants. Prospects Around Advanced Packaging Solid: Zacks Industry Rank Indicates Bleak Prospects
The Zacks Electronics - Semiconductors industry is housed within the broader Zacks
Computer and Technology sector. It currently carries a Zacks Industry Rank #139, which places it in the bottom 45% 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 solid 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.
Despite the gloomy industry outlook, a few stocks have the potential to outperform the market based on a strong earnings outlook. But before we present the top industry picks, it is worth taking a look at the industry’s shareholder returns and current valuation first.
Industry Outperforms S&P 500 & Sector
The Zacks Electronics - Semiconductors industry has surpassed the Zacks S&P 500 composite, as well as the broader Zacks Computer and Technology sector, over the past year.
The industry has dipped 2.2% over this period compared with the S&P 500’s decline of 7.9%. The broader sector has fallen 20.9% in the said period. One-Year Price Performance
Industry's Current Valuation
Based on the forward 12-month price-to-earnings ratio, a commonly used multiple for valuing electronics semiconductors stocks, the industry is currently trading at 15.58X versus the S&P 500 and the sector’s 17.87X and 22.2X, respectively.
Over the past five years, the industry has traded as high as 44.87X, as low as 5.62X and recorded a median of 13.66X, as the chart below shows. Price/Earnings Ratio (F12M)
4 Electronics Semiconductor Stocks to Keep a Close Eye on
Lattice Semiconductor: The Hillsboro, OR-based company is gaining from the strong momentum across a number of different OEM server platforms. Advancement in its products, which are highly utilized in server and client-computing platforms, remains a major positive. The Zacks Rank #1 (Strong Buy) company is well-poised to gain solid traction among client computing platforms on the back of support provided for functions like security, video bridging and IO aggregation in different form factors.
Lattice Semiconductor has returned 2% in the past year. The Zacks Consensus Estimate for the company’s 2022 earnings moved 5.7% north to $1.68 per share over the last 30 days.
Price and Consensus: LSCC ASE Technology: The Taiwan-based provider of semiconductor manufacturing services in assembly and test is gaining from the robust ATM business, which is riding on the solid momentum across product categories such as wire-bond and advanced packaging, test solutions, consumer, communications, and computing. The strengthening utilization of ATM factory lines remains another positive. The increasing use of advanced packaging in applications across computing and communications end markets is another tailwind for ASX. The Zacks Rank #2 (Buy) company is well-positioned to capitalize on the increased consumer demand for small and delicate electronics solutions on strength in wire-bonded products and advanced packaging. ASE Technology has lost 36.2% in the past year. The Zacks Consensus Estimate for ASX’s 2022 earnings moved north by 5.7% to 92 cents per share over the last 30 days. Price and Consensus: ASX GlobalFoundries: The Malta, NY-based manufacturer of a range of semiconductor devices, including microprocessors, mobile application processors, baseband processors, network processors, radio frequency modems, microcontrollers, power management units and microelectromechanical systems, continues to benefit from its position in the global semiconductor supply chain. The Zacks Rank #3 (Hold) company is positioned well to capitalize on the strengthening demand for pervasive semiconductor solutions. Its expanding global manufacturing footprint remains another major positive. GlobalFoundries has gained 20% in the past year. The Zacks Consensus Estimate for the company’s 2022 earnings was unchanged at $2.30 per share over the last 30 days. Price and Consensus: GFS Cirrus Logic: The Austin, TX-headquartered company is gaining from strong customer engagement across its portfolio. The solid demand for CRUS’s audio and haptic solutions remains another tailwind. Moreover, an increase in the penetration of its audio solutions in smartphones is a positive. CRUS is witnessing growing traction across the Android market, which is another positive. The Zacks Rank #3 company, which develops, manufactures and markets analog, mixed-signal, and audio DSP integrated circuits, remains well-positioned to capitalize on the growth opportunities in voice biometrics and closed-loop controllers. Cirrus Logic has gained 3.5% in the past year. The Zacks Consensus Estimate for the company’s fiscal 2023 earnings has moved 1.5% north to $5.54 per share over the past 30 days. Price and Consensus: CRUS