Back to top

Image: Bigstock

5 Semiconductor Stock to Buy to Enhance Your Portfolio

Read MoreHide Full Article

Wall Street finished first-quarter 2023 on a positive note. Of the three major stock indexes, — the Dow — the best performer of 2022 — was up a mere 0.4% in first-quarter 2023. The broad-market index — the S&P 500 — was up 7%.  Surprisingly, the tech-heavy Nasdaq Composite rallied 16.8% last quarter.

Within the technology sector, the rally was predominantly driven by the semiconductor industry. The Philadelphia Semiconductor index (SOX) is up 21.3% year to date. The use of chipsets is increasing rapidly in various industries of the economy. This will act as the primary catalyst for long-term growth.

Strong Demand for Chipsets

From consumer electronics to automakers, high-tech computers, medical devices and fighter jet missile systems, are using chipsets. On Aug 9, 2022, President Joe Biden signed the CHIPS Act of 2022 into a law. This legislation will provide $52 billion to help computer chip manufacturers and ease the shortage of components vital for a range of industries.

The Biden administration has expressed concerns that the United States had a 37% share of the global semiconductor and microelectronic production in 1990, which has drastically dropped to just 12%.

Consequently, U.S. businesses, especially the auto and high-tech industries are suffering from an acute shortage of chipsets owing to the breakdown of the global supply chain during the pandemic. The chipset manufacturers are thriving buoyed by the massive growth of electrical vehicles.

The explosion of artificial intelligence (AI) in both the production process and the final products has created tremendous opportunities for chipset manufacturers. The data-centric computing architecture, especially, cloud computing, the Internet of Things (IoT) and the metaverse, has expanded the horizon for semiconductors.

The pandemic-led social transformation has established digitization as the new normal. The outbreak of coronavirus quickly changed the lifestyle and lookout of people. The latest advent of the digitization space is the metaverse. In a nutshell, metaverse means a virtual world that is interactive and collaborative. The digital space is powered using virtual and augmented reality. Therefore, high-tech semiconductors are an essential part of metaverse.

Several giant chipset manufacturers in the United States, Asia and Europe are ramping up capital spending creating new facilities for chipset production to cater to massive pent-up demand. The demand for chipsets will remain strong due to the complexity of new leading-edge technologies.

Our Top Picks

We have narrowed our search to five semiconductor manufacturers. These stocks have positive growth potential for 2023 and have witnessed solid earnings estimate revisions within the last 60 days. Each of our picks carries a Zacks Rank #2 (Buy). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

The chart below shows the price performance of our five picks in the past three months.

Zacks Investment Research
Image Source: Zacks Investment Research

Analog Devices Inc. (ADI - Free Report) has strength across communication, consumer, industrial and automotive end-markets. Further, solid demand for high-performance analog and mixed-signal solutions has acted as a tailwind. Growing momentum across the electric vehicle space on the back of robust Battery Management System solutions remains a positive for ADI.

Growing power design wins are the other positives for Analog Devices. The solid momentum of the HEV platform across the cabin electronics ecosystem remains a tailwind for ADI. Moreover, Analog Devices remains optimistic about the growth prospects associated with its Maxim acquisition and 5G.

Analog Devices has an expected revenue and earnings growth rate of 5.3% and 10.8%, respectively, for the current fiscal-year (ending October 2023). The Zacks Consensus Estimate for its current fiscal-year earnings has improved 9.4% over the last 60 days.

Microchip Technology Inc. (MCHP - Free Report) is riding on consistent strength in its analog and microcontroller businesses. MCHP’s dominance in 8,16 and 32-bit microcontrollers is driving top-line growth.

Strategic acquisitions like Microsemi and Atmel have expanded the product portfolio. MCHP is gaining from a recovery in demand across industrial, automotive and consumer end-markets, on the reopening of economies, globally. Collaboration with the likes of AWS is another positive.

Microchip Technology has expected revenue and earnings growth rates of 2.5% and 2.7%, respectively, for the current fiscal-year (ending March 2024). The Zacks Consensus Estimate for the current fiscal-year earnings has improved 0.2% over the last 60 days.

Lam Research Corp. (LRCX - Free Report) is benefiting from strength across systems and customer support businesses. Rising NAND requirement in accelerating 5G migration, video, and new game consoles is driving the top-line growth. Strong momentum in the foundry and logic segment owing to the growing traction among etch and deposition technologies, is a major positive for LRCX.

Per our estimates, foundry, and logic/other revenues are expected to rise 10.1% and 10.9% in fiscal 2023 from fiscal 2022, respectively. Additionally, strength in both ALD metals and dielectrics deposition solutions is contributing well to LRCX. Advanced packaging technology inflections are the other positives.

Lam Research has an expected revenue and earnings growth rate of 2.4% and 0.5%, respectively, for the current fiscal-year (ending June 2023). The Zacks Consensus Estimate for its current fiscal-year earnings has improved 0.1% over the last 60 days.

MACOM Technology Solutions Holdings Inc. (MTSI - Free Report) is benefiting from solid momentum across telecommunication, data center, and industrial and defense markets. Strong 5G network deployments, rising demand for its RF and microwave products and strength across defense applications are expected to continue driving the top-line growth of MTSI.

The growing proliferation of cloud services is likely to continue benefiting both domestic and international deployments of MTSI. Solid adoption of high-performance analog components such as TIAs, CDRs and drivers required in 100G deployment, remains another positive.

MACOM Technology has expected revenue and earnings growth rates of 0.9% and 8.5%, respectively, for the current fiscal-year (ending September 2023). The Zacks Consensus Estimate for the current fiscal-year earnings has improved 0.3% over the last 60 days.

STMicroelectronics N.V. (STM - Free Report) is a global independent semiconductor company which designs, develops, manufactures, and markets a broad range of semiconductor integrated circuits and discrete devices used in a wide variety of microelectronic applications.

STM operates through the Automotive and Discrete Group, Analog, MEMS and Sensors Group, and Microcontrollers and Digital ICs Group segments. STM sells its products in Europe, the Middle East, Africa, the Americas, and the Asia Pacific.

STMicroelectronics has expected revenue and earnings growth rates of 0.1% and 4%, respectively, for next year. The Zacks Consensus Estimate for next-year earnings has improved 0.1% over the last 60 days.

Published in