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Bright Near-Term Outlook for Semi Communications Industry

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The Zacks Semiconductor – Communications industry primarily comprises companies that provide integrated circuits, which are used in storage, network computing and connectivity devices.

The industry participants primarily cater to end markets that constitute consumer, mobile, desktop, automotive, industrial, communications, IoT, wearable devices and others.

Here are the industry’s three major themes:

 

  • IoT is fast gaining market traction and bringing about fundamental changes in business models. It is advancing on the back of cloud storage and growing interconnectedness of things. Increasing use of IoT solutions in retail and transportation industries, and for the development of connected smart cities is driving growth of this industry.
     
  • Another factor driving this industry’s growth is an expanding automotive market, which continues to gain traction on increasing consumer demand for added technology, features in new vehicles, and transition to hybrid and electric vehicles. The increased need for safety and infotainment requirements in these markets should continue to drive demand for semiconductors.
     
  • The majority of the industry participants depend on China for growth, particularly in areas of automotive and industrial automation, as well as semiconductor applications. The entire space, which derives a sizable portion of revenues from this region, is tottering from the ongoing U.S.-China trade dispute. Also, the outbreak of coronavirus in China impacted the industry participants as they have significant exposure in the country.

Zacks Industry Rank Indicates Solid Prospects

The Zacks Semiconductor – Communications industry is housed within the broader Zacks Computer and Technology sector. It carries a Zacks Industry Rank #55, which places it in the top 22% 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 encouraging 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.

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 Outperforms S&P 500 & Sector

The Zacks Semiconductor – Communications industry has outperformed the Zacks S&P 500 composite, and the broader Zacks Computer and Technology sector over the past year.

The industry has gained 18.7% over this period compared with the S&P 500’s rise of 5.5% and the broader sector’s rally of 10.9%.

One-Year Price Performance

Industry’s Current Valuation

On the basis of forward 12-month price-to-earnings, which is a commonly used multiple for valuing Semiconductor – Communications stocks, the industry is currently trading at 29.17X versus the S&P 500’s 17.01X and the sector’s 19.93X.

Over the past five years, the industry has traded as high as 37.93X, as low as 13.64X and recorded a median of 23.72X, as shown in the charts below.

Price-to-Earnings (P/E) Ratio (F1)

Price-to-Earnings (P/E) Ratio (F1)

Bottom Line

Growing adoption of IoTs, smartphones, storage solutions, networking and connectivity solutions — including Wi-Fi as well as Wi-Fi/Bluetooth integrated SOCs — and the need for high-speed data in both communications networks and data centers bode well for the industry participants. Strong demand for analog integrated circles (ICs) should continue to drive the industry’s growth.

None of the stocks in the Zacks Semiconductor – Communications industry flaunt a Zacks Rank #1 (Strong Buy). However, we present two stocks that carry a Zacks Rank #2 (Buy) and are well positioned to outperform the market. You can see the complete list of today’s Zacks #1 Rank stocks here.

Cypress Semiconductor Corporation CY, an original equipment manufacturer of digital and mixed-signal ICs, has gained 8.2% over the past year. The Zacks Consensus Estimate for earnings for the current year has remained stable at $1.21 per share over the past 30 days.

Price and Consensus: CY

NeoPhotonics Corporation (NPTN - Free Report) — a manufacture of photonic integrated circuit or PIC-based modules and subsystems for bandwidth-intensive, high-speed communications networks — has gained 0.7% over the past year. The Zacks Consensus Estimate for earnings for the current year has increased 41.7% to 34 cents per share over the past 30 days.

Price and Consensus: NPTN

This is a stock with a Zacks Rank #3 (Hold) that investors may currently hold on to.

DSP Group, Inc. (DSPG - Free Report) , a fabless semiconductor company offering advanced chip-set solutions for a variety of applications, has gained 0.9% over the past year. The Zacks Consensus Estimate for earnings for the current year has remained stable at 31 cents per share over the past 30 days.

Price and Consensus: DSPG

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