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.
According to the Semiconductor Industry Association (SIA), the U.S. is the largest producer of semiconductors with 44% market share. The group estimates that overall semiconductors grew 13.7% in 2018 driven by double digit growth in the automotive, computing, communications, government and industrial end markets.
Three major themes shaping the industry are-
Being on the building-block side of technology, it will continue to benefit from the proliferation of the Internet and the growing digitization of our lives in the foreseeable future. That means not only the smartphones (expected to rebound next year on the back of 5G demand) and PCs that have become commonplace, but also IoT, including home automation (IDC expects 23.5% growth in 2019 and a 14.4% CAGR between 2019 and 2023), automotive electronics (imarc estimates 8% CAGR in 2019-2024, Global Insights estimates 7% CAGR between 2019 and 2030) and AI (PWC expects a 50% CAGR between 2019 and 2022, albeit off a relatively small base of $6 billion). These factors are expected to boost the industry going into 2020.
Because of the growth potential in emerging markets, regulatory (and/or political) issues, particularly in places like China, can play an increasingly important role. In this context, the government’s strong stance against prime trading partner China has cast a shadow over the space, especially since a quick resolution to the conflict doesn’t look likely any more. Semiconductor companies in particular would have benefited because the Chinese government’s drive to build its own industry would have required plenty of collaborations with leading semiconductor players.
The government is more concerned about IP protection and is trying to delay as far as possible, China’s own technological maturity. This is particularly negative for the industry because semiconductors typically go into manufacturing devices, the largest chunk of which is made in China.
Because end devices have to be priced lower to reach more people, the pressure on companies to bring down cost will remain. So 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. Industry consolidation is also likely to continue as larger players add expertise through acquisitions. There’s also likely to be close collaboration with device makers facilitating quicker consumption and better inventory management.
Zacks Industry Rank Indicates Limited Returns
The Zacks Semiconductor-General Industry is a stock group within the broader Zacks Computer and Technology Sector. It carries a Zacks Industry Rank #45, which places it in the top 18% 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 bright 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 the positive earnings outlook for the constituent companies in aggregate. Looking at the aggregate earnings estimate revisions, it appears that analysts were mostly losing confidence in the company up to June 2019. There was a slight improvement thereafter, followed by more significant improvement by October-end. So although the industry’s earnings estimate for the current year has declined 5.4% over the past year, the trend is positive.
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 Lags on Stock Market Performance
The Zacks Semiconductor – General Industry has pulled ahead of both the broader Zacks Computer and Technology Sector and the S&P 500 index over the past year.
The industry gained 29.5% during this period compared to the S&P 500 index’s increase of 18.2% and the broader sector’s increase of 21.0%.
One-Year Price Performance
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 17.14X, above the 15.69X median value but below the S&P 500’s 18.13X. It is also below the sector’s forward-12-month P/E of 21.26X.
Over the last five years, the industry has traded as high as 19.73X, as low as 12.86X and at the median of 16.17X, as the chart below shows.
Forward 12 Month Price-to-Earnings (P/E) Ratio
While secular growth factors remain solid going into 2020, the U.S. stand against China could play spoiler. Additionally, the optimism about growth prospects is already sending share prices up, so valuation may be something to keep an eye on. That said, here are a few stocks with good potential:
Intel Corp (INTC - Free Report) : This Zacks Rank #2 (Buy) stock has gained 18.4% over the past year. The Zacks Consensus Estimate for the current-year EPS has increased 24 cents (5.5%) in the last 60 days.
Price and Consensus: INTC
NVIDIA Corp (NVDA - Free Report) : The Zacks Rank #2 (Buy) stock has gained 43.7% over the past year. The Zacks Consensus Estimate for the current-year EPS moved up 22 cents (4.1%) in the last 30 days.
Price and Consensus: NVDA
STMicroelectronics N.V. (STM - Free Report) : The Zacks Rank #2 (Buy) stock has gained 86.1% over the past year. The Zacks Consensus Estimate for the current-year EPS moved up 6 cents (5.9%) in the last 60 days.
Price and Consensus: STM
5 Stocks Set to Double
Each was hand-picked by a Zacks expert as the #1 favorite stock to gain +100% or more in 2020. Each comes from a different sector and has unique qualities and catalysts that could fuel exceptional growth.
Most of the stocks in this report are flying under Wall Street radar, which provides a great opportunity to get in on the ground floor.
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