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Semiconductor - Communications Stock Outlook: Growth Prospects Solid

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The Semiconductor – Communications Industry includes companies that provide analog, mixed-signal and digital signal processing integrated circuits to consumer, mobile, desktop, automotive, industrial, IoT, wearable devices and other markets.

This industry is benefiting from rapid technological changes, increasing use of mobile and IoT devices, data storage and the usage of high speed digital optical signals needed for communications networks and data centers, among others.

IoT is fast gaining market traction and bringing about fundamental changes in business models. It is growing on the back of cloud storage and increasing interconnectedness. The rampant use of these IoT products in the retail and transportation industries, as well as in the development of connected smart cities is driving the growth of the Semiconductor – Communications industry.

Another growth driver is the automotive market, where safety and infotainment requirements continue to push up demand for semiconductors.

However, trade tensions between the United States and China, which commenced in March, is expected to intensify as the days progress and could dampen the growth of the Semiconductor – Communications industry.

Industry Lags on Shareholder Returns

Looking at shareholder returns over the past year, it appears that the ongoing trade tension between the United States and China, and growing U.S. protectionism has been dampening investor sentiment toward the Semiconductor – Communications Industry.

The Zacks Semiconductor – Communications Industry, within the broader Zacks Computer And Technology Sector, has underperformed both the S&P 500 and its own sector over the past year.

While the stocks in this industry have collectively gained 8.9%, the Zacks S&P 500 Composite and Zacks Computer And Technology Sector have rallied 17.9% and 19.8%, respectively.

One-Year Price Performance

Semiconductor – Communications Stocks Trading Cheap

The Semiconductor – Communications industry’s valuation looks cheap at the moment. One might get a good sense of the industry’s relative valuation by looking at its price-to-earnings ratio (P/E), which essentially shows how much an investor is willing to pay for each unit of earnings.

Notably, a lower P/E ratio is always better.

The industry currently has a forward 12-month P/E ratio of 16.58, which is below the median level and close to the lowest level over the past year.

The space also looks inexpensive when compared with the market at large, as the forward 12-month P/E ratio for the S&P 500 is 17.57 and the median level is 17.58.

Price-to-Earnings Ratio (F12M)

Moreover, a comparison of the group’s P/E ratio with that of its broader sector ensures that the group is trading at a huge discount. The Zacks Computer and Technology Sector’s forward 12-month P/E ratio of 19.99, which is below the median level for the same period, is way above both the ratios for the Zacks Semiconductor – Communications Industry.

Price-to-Earnings Ratio (F12M)

Earnings Outlook Does Not Evoke Much Optimism

Moreover,strong industry fundamentals and expectations of solid top-line growth should continue to generate positive shareholder returns in the near future.

But what really matters to investors is whether this group has the potential to perform better than the broader market in the quarters ahead.

One reliable measure that can help investors understand the industry’s prospects for a solid price performance is its earnings outlook. Empirical research shows that earnings outlook for the industry, a reflection of the earnings revision trend for the constituent companies, has a direct bearing on its stock market performance.

The Price & Consensus chart for the industry shows the market's evolving bottom-up earnings expectations for it and the industry's aggregate stock market performance.

Price and Consensus: Zacks Semiconductor Communications Industry

This becomes even clearer by focusing on the aggregate bottom-up EPS revisions trend. The chart below shows the evolution of the aggregate consensus expectations for 2018.

Please note that the$0.84 EPS estimate for the industry for 2018 is not the actual bottom-up EPS estimate for every company in it, but rather an illustrative aggregate number created by our proprietary analytics model. The key factor to keep in mind is not the EPS of the industry for 2018, but how this projection has evolved recently.

As you can see here, the $0.84 EPS estimate for 2018 has declined from $1.01 at the end of July. In other words, the sell-side analysts covering the companies in the Zacks Semiconductor – Communications industry have been pessimistic about raising their estimates.

Current Fiscal Year EPS Estimate Revisions

Zacks Industry Rank Indicates Solid Prospects

The group’s Zacks Industry Rank, which is basically the average of the Zacks Rank of all the member stocks, indicates continued outperformance in the near term.

The Zacks Semiconductor – Communications industry currently carries a Zacks Industry Rank #25, which places it at the top 10% of 256 Zacks industries. 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.

Our proprietary Heat Map shows that the industry’s rank has continuously improved over the past five weeks.

 

Long-Term Growth Prospects Strong

The long-term (3-5 years) EPS growth estimate for the Zacks Semiconductor – Communications industry appears promising. The group’s mean estimate of long-term EPS growth rate has remained steady since May 2018 to reach the current level of 13.47%. This compares with 9.8% for the Zacks S&P 500 composite.

Mean Estimate of Long-Term EPS Growth Rate

Semiconductor – Communications’ long-term growth prospects are alluring. Growing adoption of IoT, smartphones, storage solutions, networking and connectivity solutions, including Wi-Fi, and Wi-Fi/Bluetooth integrated SOCs and the need for high speed data in both communications networks and data centers bode well for the industry.

Moreover, another indication of solid long-term prospects is the improvement in the group’s gross margin.

 

 

Bottom Line

The near-term growth prospect for Zacks Semiconductor – Communications is encouraging for investors, despite the ongoing trade tension between the United States and China.

The surging demand for solid state drives (SSD), modern switches, networking processors and technologies for smart home devices are expected to benefit the Zacks Semiconductor – Communications industry.

Moreover, the demand for autonomous vehicles is expected to increase significantly, thereby driving growth for the solutions offered by the industry participants.

Here, we list two stocks that have been witnessing positive earnings estimate revisions and carry a Zacks Rank #1 (Strong Buy) or 2 (Buy).

(You can see the complete list of today’s Zacks #1 Rank stocks here.)

Cypress Semiconductor Corp. (CY - Free Report) : The stock has rallied 9.5% over the past year. The company sports a Zacks Rank #1 and has an average four-quarter positive earnings surprise of 13.92%.

Price and Consensus: CY

 

NeoPhotonics Corp. (NPTN - Free Report) : The stock has gained 40.7% over the past year. The company carries a Zacks Rank #2 (Buy) and has an average four-quarter negative earnings surprise of 9.05%.

Price and Consensus: NPTN

 

However, DSP Group, Inc. (DSPG - Free Report) is one stock in the Zacks Semiconductor – Communications industry that investors can hold in the near term.The company has a Zacks Rank #3 and an average four-quarter positive earnings surprise of 115.28%.

Price and Consensus: DSPG

 

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