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The Zacks Analyst Blog Highlights: WESCO International, United Microelectronics, ASE Technology, Alpha and Omega Semiconductor, and Silicon Motion Technology

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For Immediate Release

Chicago, IL – February 16, 2022 – Zacks.com announces the list of stocks featured in the Analyst Blog. Every day the Zacks Equity Research analysts discuss the latest news and events impacting stocks and the financial markets. Stocks recently featured in the blog include: WESCO International (WCC - Free Report) , United Microelectronics (UMC - Free Report) , ASE Technology (ASX - Free Report) , Alpha and Omega Semiconductor (AOSL - Free Report) , and Silicon Motion Technology (SIMO - Free Report) .

Here are highlights from Tuesday’s Analyst Blog:

Chipmaker Consolidation Is Good News: 5 Picks

Sometimes, when we talk about semiconductor shortages, we overlook the fact that these companies generally operate a just-in-time model, meaning that they are lean and mean operations that typically produce to order.

So the shortage of semiconductors is not related so much to the supply chain (although there were initially some concerns on that front as well), as to their operating model, which leaves little free capacity to deal with any surge in demand. And the auto market has borne the brunt of it this time.

Companies generally pay very well to retain the highly-skilled workforce they require. So labor has also not been a major issue during the pandemic, barring infections that led to fab shut-downs a couple of times.

A bigger factor in chipmaking today, and one that is likely to grow in importance, is the government’s role in the industry. Semiconductors are at the heart of defense applications, making them an important factor in national security, especially in the age of artificial intelligence (AI).

in the last few decades, most of the leading-edge manufacturing has moved to a number of Asian countries, particularly Taiwan and South Korea, leaving American players to focus on design. Intel has been an outlier here since it has its own manufacturing facilities. But since Intel lost its process lead to AMD, which does its manufacturing at Taiwan Semiconductor, the situation has now changed.

So there is a growing need to bring more leading edge manufacturing onshore. The CHIPS Act will be a boost to these efforts. But in the meantime, the government will try influencing Taiwan Semiconductor and Intel.

Taiwan Semiconductor has already agreed to set up a facility in the U.S. And Intel recently announced that it would invest $100 billion to build what could be the world's largest chip-making complex in Ohio. It’s a good move for Intel since a strong foundry business will help fill idle capacity, generate revenues and buy the time it needs to research and develop leading-edge capabilities (and perhaps attempt to take back market share it continues to lose to AMD).

Ongoing M&A

Intel has also been shopping for capacity. After losing out on Globalfoundries, which decided to go public instead, it continued talks with other players. The chipmaker has now announced its acquisition of Tower Semiconductor of Israel, which makes analog chips for the automotive, mobile, medical and aerospace industries.

Apart from that fact that they do not require the most advanced manufacturing technology that Intel doesn’t have at the moment, the business positions Intel in markets that will allow it to tap the opportunity that the pandemic has thrown at us. But there’s still a long way to go before it can provide meaningful competition to Taiwan Semiconductor.

The other M&A news was the closing of AMD’s acquisition of Xilinx, which is a new segment within AMD called Adaptive and Embedded Computing Group and headed by its CEO Victor Peng. This acquisition is, however, all about leading edge chips for the data center, cloud and in AI applications where AMD still has limited presence.

This deal combines AMD’s processor tech with SoCs and FPGAs from Xilinx, potentially helping AMD gain a foothold in these verticals. Xilinx’s other important served markets are 5G communications, automotive, industrial, aerospace and defense, all very important places to be.

Lisa Su, who is to become the CEO and chairman of the combined company, which now has 15,000 engineers, says that the acquisition will be accretive in the first year for gross margins, earnings per share and free cash flow. She also expects AMD to grow at over 20% in the next few years. The deal is expected to yield $300 million in cost savings.

Why M&A Is Good For Us

Semiconductor R&D is extremely resource intensive. It has always been difficult to develop advanced chips and designs, not only because they are complex but also because they require a lot of resources. Additionally, the devices that use them are often not that high end. So there’s a pressure on companies to give more for less.

Scaling takes care of part of the problem because the cost can be spread over larger and larger number of units. And some segments (like enterprise) are willing to pay more for more power, lower cost per watt and lower total cost of ownership. So the problem of lower-end markets is taken care of with high volumes while higher-end markets are where the more advanced logic chips go.

But development costs keep increasing with not as much increase in what can be earned from them. So pooling resources and capabilities mainly through acquisitions remains a strategy for semiconductor players. And it has proved imperative for continued innovation. However, as smaller players continue to be taken over by larger players, acquisitions sizes have grown.

Enter Russia-Ukraine Conflict

Russia and Ukraine going to war is just not good news for chip availability because it could shrink supply of key ingredients such as rare earth scandium or palladium, of which Russia is the leading supplier (it produces 45% of the global supply of palladium) and purified neon gas, of which Ukraine is the leading supplier. They also collaboratively produce various industrial gases that are used in semiconductor lithography or etching processes. A confrontation will increase cost of these components, further driving up semiconductor prices.

Semiconductor Stocks Looking Good Today

In the semiconductor market we’re spoiled for choice. However, if we are getting in at this point, it’s easy to see that a lot of the good news has already been priced in. So finding a stock that isn’t too expensive can be tricky.

One way of separating the grain from the chaff is by finding stocks with Zacks #1 (Strong Buy) or #2 (Buy) ranks that also have A or B scores for both value and growth, as well as a positive estimate revisions trend. Based on these criteria, the following stocks look good-

WESCO International: Zacks Rank #2 (Buy) Both Value and Growth Scores are A

United Microelectronics: Zacks Rank #2, A for both Value and Growth

ASE Technology: Zacks Rank #2, A for both Value and Growth

Alpha and Omega Semiconductor: Zacks Rank #2, A for Value and B for Growth

Silicon Motion Technology: Zacks Rank #2, B for both Value and Growth

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