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Zacks Industry Outlook Highlights Semtech, MACOM Technology and Magnachip

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For Immediate Release

Chicago, IL – February 9, 2024 – Today, Zacks Equity Research discusses Semtech Corp. (SMTC - Free Report) , MACOM Technology Solutions (MTSI - Free Report) and Magnachip Semiconductor Corp. (MX - Free Report) .

Industry: Semiconductors


This year is likely to be much better than the last for the semiconductor market as a whole, as inventories across several important markets, including computing, smartphone and industrial were worked down in second-half 2023. The World Semiconductor Trade Statistics (WSTS), which supplies data to the Semiconductor Industry Association (SIA), is projecting 13.1% growth in semiconductors this year on the back of a 40% jump in memory demand.

Discrete, sensors, analog, logic and micro are also expected to grow, albeit at single-digit percentage rates. While growth will be across geographies, the Americas and Asia will post strong double-digit growth.

For the Analog/mixed signal group, the going is likely to be less smooth. That’s because many of these players have increased their exposure to auto and industrial markets, where design wins have more shelf life. These end markets are pulling the industry down notwithstanding the fact that growth prospects over the next 5-10 years remain excellent, because of the adoption of new technologies like AI-ML, EVs, smart cities, IoT, etc.

The fourth quarter was likely the bottom for his industry, according to market research firms. Macro-related uncertainties remain, however, limiting growth. Semtech stock looks good right now, and Macom Technology and Magnachip Semiconductor could also be worth keeping an eye on.

About the Industry

The electronic gadgets we use to accurately read our commands, and record, store, retrieve and process the information we throw at them run on semiconductor technology, whether analog (enabling the recording and measurement of real-world information), digital (processing information available in machine-readable language) or mixed signal (enabling conversion of analog signals to digital or digital to analog among other things). Most electronic gadgets use a combination of these components, whether in consumer, industrial, auto, medical, communications, or IoT and other markets.

The industry is cyclical and prices are elastic. Players usually serve multiple markets that offset their individual seasonality, or focus on certain core markets for which they have highly differentiated technology and relationships.

Major Themes for the Industry

  • The semiconductor market is expected to return to growth this year. Gartner estimates that growth will be 16.8% in 2024, as memory comes off a very bad 2023 amid weak demand that led to an inventory glut. With memory bouncing 66.3%, that situation will turn around. The analog/mixed signal market is also expected to grow, and end-market demand reflects this. PCs have been weak for a while now (Gartner expects return to growth in 2024, as inventory is worked down in the fourth quarter. IDC agrees, citing a PC refresh cycle - there’s the possibility of commercial refresh stretching out to 2025 when Windows 10 support ends - and AI integration. However, the expected 3.4% growth in 2024 implies that units won’t surpass pre-pandemic levels until the following year, attributed to macro concerns leading to softer business PC demand and some consumer inventory built in the fourth quarter in anticipation of imminent cost escalation.) Smartphone growth is not expected to be like before (3.8% growth in 2024 and 1.4% CAGR for the next five years, with inventories normalizing and mainly driven by stronger pricing and recovery in China, according to IDC). Inventory adjustments are also impacting the industrial market, with macro-related uncertainty continuing. Other markets like automotive, IoT, cloud and AI are better off. AI in particular is a boom market as of now. According to Gartner, only 5% of companies were using generative AI in 2023, which will grow to 80% by 2026. AI semiconductors will be 20% of total semiconductor sales by 2027, estimates Statista (as quoted in Nikkei). Technological innovation in the form of the metaverse, digital health, EVs and other innovative transportation, and sustainability considerations are secular drivers. Uncertainties related to dealing with China remain.
  • Certain key end markets for analog/mixed signal chips are headed down this year. First among them is the automotive market. The pandemic-related surge has more or less run its course. A weak macro situation, high interest rates, soft consumer sentiment and escalating geopolitical tensions are also not conducive. As a result, the outlook is not great for this market, according to S&P Global Ratings. That said, EVs should benefit from new models and government subsidies, although the number of players in this market seems to indicate that some will have to be pushed out for the others to succeed. As far as the industrial market is concerned, there is a difference of opinion. The ISM data indicates that manufacturing contracted again in January and has been contracting for more than a year. According to S&P Global, it has been a roller coaster ride, with sharp increases and decreases over the past year. Both agree that significant uncertainty remains in the manufacturing sector.
  • ·The industry is likely to see continued operating challenges. If the weakness persists, semiconductor manufacturers will be driven to cut production, thus lowering utilization rates. At the same time, new fab construction, often supported by government initiatives, and their equipping remains in full swing, which brings additional capacity online. This does not look good for pricing.
  • An emerging issue that semiconductor players are particularly exposed to is geopolitical tensions. The semiconductor supply chain is globally distributed, which means that international relations need to be maintained to ensure that work continues without disruption. While the Russia-Ukraine war didn’t have that much of an impact, the souring of relations between the U.S. and China is another story. If China really tries to take control of Taiwan as many experts expect it will, there could be a terrible war that will be highly disruptive of the global economy and especially of the chip sector. That’s because a leading share of advanced node chips are made on the island. Another geopolitical concern is the increasing awareness among all leading nations of the larger role that semiconductors are playing in AI-driven electronic weaponry and surveillance mechanisms. As the importance of semiconductors in defense grows, the need to onshore or near-shore production is being felt. This is leading to rebalancing of the semiconductor supply chain not from a cost-reduction perspective but with a far more strategic objective. So the government is trying to incentivize companies to build in the U.S. TSM, the main supplier to the U.S. is setting up in the country but the plan is to have this on a much larger scale. The CHIPS Act may help a difficult situation where increased capacity would depress prices while U.S. production would increase costs.

Zacks Industry Rank Indicates Weakness

The Zacks Semiconductor – Analog and Mixed industry is housed within the broader Zacks Computer and Technology sector. It carries a Zacks Industry Rank #223, which places it in the bottom 11% of the 250 odd Zacks-classified industries.

The industry’s positioning in the bottom 50% of Zacks-ranked industries is based on the earnings outlook for the constituent companies in aggregate. Looking at the aggregate earnings estimate revisions over the past year, we see that analyst opinion about the outlook for both 2023 and 2024 has materially deteriorated over the past year, and particularly since July. Overall, the 2024 estimates have dropped 25.7% over the past year, while the 2025 estimates have dropped 19.3%.

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.

Stock Market Performance Continues to Lag

The Semiconductor – Analog and Mixed industry currently trades at a discount to both the broader Zacks Computer and Technology sector and the S&P 500. However, while it has reached the level of the S&P 500 at times, the sector has been trading at a much higher multiple throughout.

Overall, the industry gained 6.1% over the past year while the broader sector gained 42.3% and the S&P 500 21.1%.

Industry's Current Valuation

On the basis of forward 12-month price-to-earnings (P/E) ratio, the industry is trading at a 23.2X multiple, which is a premium to the S&P 500’s 20.6X and a discount to the broader computer and technology sector’s 26.1X. At the current level, it is also trading at a premium to its median level of 18.9X over the past year.

The industry has traded between the 15.9X and 23.3X multiples over the past year.

3 Stocks to Weather the Uncertainty

Semtech Corp.: Semtech produces and sells analog and mixed-signal chips for industrial, infrastructure, communications, medical and consumer applications across the Asia- Pacific, North America and Europe. Its products (signal integrity, advanced protection and sensing, IoT systems, and IoT connected services) are primarily sold to OEM customers but also to various other industrial customers.

The company’s 2 cent profit beat our estimated loss of 15 cents by 113.3%. For the year ended Jan 2024, analysts raised their estimates by 3 cents (38%). The 2025 estimate dropped a penny however. Analysts currently expect revenue to increase 14.6% in fiscal 2024, dropping 1.1% the following year. Earnings on the other hand are projected to decline over 96% this year followed by a 395% increase in 2025.

The last quarter’s results benefited from a substantial contribution from the Sierra Wireless acquisition. Related synergies are expected to support future earnings. The ongoing restructuring effort is expected to better align costs with revenue, also supporting earnings even when revenue goes flat to down.

The Zacks #1 (Strong Buy) ranked stock is down 39.7% in the past year.

MACOM Technology Solutions: Headquartered in Lowell, Massachusetts, MACOM offers semiconductor products like standard and custom devices, including integrated circuits, multi-chip modules, diodes, amplifiers, switches and switch limiters, passive and active components, and subsystems. Its products are used in wireless and wireline applications across the radio frequency (RF), microwave, millimeter wave and lightwave spectrum in the U.S., China, Australia, Japan, Malaysia, Singapore, South Korea, Taiwan and Thailand.

MACOM‘s fourth quarter earnings beat the Zacks Consensus Estimate by a sliver (1.75%). The estimates for 2024 and 2025 (ending September) are down a respective 4 cents and 6 cents in the last seven days. This works out to revenue and earnings growth of 2% and -2.2% in 2024 and 16.9% and 24.8% in 2025.

Broader macro concerns are hurting the company’s industrial and telecom prospects and the expectation is for modest growth at best in 2024. Prospects on the defense side look robust. The company has been opportunistic about getting into big programs in the last few years that has allowed it to grow at double digit rates. Growth may moderate somewhat from these levels, although the strategies of cross-selling capabilities and developing multifunction assembles is likely to pay dividends.

Overall, management focus on high-frequency, high-power and high-data rate applications are expected to strengthen the company’s market position and drive its results in ensuing quarters.

Shares of this Zacks Rank #3 (Hold) company dropped sharply after the quarter’s earnings announcement and now represent a 19.9% increase over the past year.

Magnachip Semiconductor Corp.: Cheongju, South Korea-based Magnachip Semiconductor Corporation designs and manufactures analog and mixed-signal semiconductor platform solutions for consumer, computing and industrial (including IoT and automotive) electronics OEMs, ODMs and EMS companies, as well as subsystem designers in Korea, the Asia Pacific, the U.S. and Europe. The company sells its products through a direct sales force, as well as through a network of agents and distributors.

The bulk of the business comes from its Power Solutions business, which remains under pressure from inventory rebalancing at industrial customers. Magnachip is however seeing continued momentum in design wins, particularly at auto OEMs. Demand from consumer, computing and communication markets also remains strong.

The business should become more profitable as newer, higher-ASP products grow in the mix and utilization improves. OLED business softened in the last quarter because of softness in China although the company continued to expand the customer base, which is positive for long-term growth. Therefore, the longer-term prospects as seen from new product innovation and design win momentum are strong, although macro concerns and inventory rebalancing could mean that near-term numbers will move around a little bit.

That’s probably why, despite the 79% beat in the last quarter, estimates haven’t moved up for either 2023 or 2024. Analysts expect that in 2024, the company’s top and bottom lines will increase a respective 22.6% and 8.7%.

#3 ranked Magnachip’s shares are down 34.8% over the past year.

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