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. The industry includes companies like Intel, NVIDIA, Texas Instruments and STMicroelectronics.
According to the Semiconductor Industry Association (SIA), the U.S. is the largest producer of semiconductors with 45% market share. The SIA’s April report showed that February sales slid 2.4% from January because of coronavirus-related slowdown in demand from China. Needless to say, the pandemic has introduced significant uncertainties.
There are three major themes shaping the industry-
- Being on the building-block side of technology, the industry stands to benefit from the proliferation of the Internet and the growing digitization of our lives, irrespective of the direction we move in the future. So, if the pandemic changes the way we do things, it will have a profound impact on the semiconductor industry that may necessitate the reallocation of resources to areas of greater demand. Smartphones (expected to rebound around the time that 5G demand picks up) and PCs (more people working from home) will likely hold up, while AI (PWC expects a 50% CAGR between 2019 and 2022, albeit off a relatively small base of $6 billion) should grow. But things like IoT, which includes home automation (IDC expects 23.5% growth in 2019 and a 14.4% CAGR between 2019 and 2023) could see some of this reallocation if the job market suffers for an extended period. Automotive electronics (imarc estimates 8% CAGR in 2019-2024, Global Insights estimates 7% CAGR between 2019 and 2030) could be particularly hard-hit. Automation and robotics could pick up. Post-pandemic numbers aren’t available and may only be expected after more of the disaster plays itself out. In general, work-related areas are likely to be less impacted because it is the blue-collar jobs that are mainly at risk.
- 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 and the pandemic hasn’t helped. Semiconductor companies in particular stand to benefit from a truce between the U.S. and China as 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 #83, which places it in the top 33% 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 expecting the industry to rebound in 2020. But expectations dropped off in March and fell further in April. So the net decline in the 2020 estimate in aggregate is 0.4% over the past year. The 2021 estimate is down 6.3%.
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
Tracking the performance of the Zacks Semiconductor – General Industry over the past year shows that the industry has trailed both the broader Zacks Computer and Technology Sector and the S&P 500 index going into 2020 but has pulled ahead since then.
The industry gained 16.1% over the past year compared to the S&P 500 index’s decline of 4.0% and the broader sector’s increase of 0.9%.
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 18.56X, its highest level over the past year but below the S&P 500’s 18.92X and the sector’s forward-12-month P/E of 20.88X.
Over the last five years, the industry has traded as high as 19.73X, as low as 12.86X and at the median of 16.30X, as the chart below shows.
Forward 12 Month Price-to-Earnings (P/E) Ratio
Any change in the way we do things will have a profound impact on the industry and ay require reallocation of resources (for the long term). Work-related segments should be more resilient, which is the reason for relative optimism about the industry. But this has made valuation unattractive, especially given increased uncertainties. So here are some solid names that we may opt for when the valuation is more conducive:
Intel Corp (INTC - Free Report) : This Zacks Rank #3 (Buy) stock has gained 3.8% over the past year. The Zacks Consensus Estimate for the current-year EPS has increased 2 cents in the last 7 days.
Price and Consensus: INTC
NVIDIA Corp (NVDA - Free Report) : The Zacks Rank #2 (Buy) stock has gained 57.3% over the past year. The Zacks Consensus Estimate for the current-year EPS moved up 4 cents in the last 30 days.
Price and Consensus: NVDA
Texas Instruments (TXN - Free Report) : The Zacks Rank #2 (Buy) stock has dropped 3.6% over the past year. The Zacks Consensus Estimate for the current-year EPS remains unchanged in the last 7 days.
Price and Consensus: TXN
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