Investors have seen a tug of war in the semiconductor space. The passage of the CHIP Act has added a bullish tailwind to the sector, while economic uncertainty and ongoing supply chain issues have been a challenging headwind. Several leading advisors and contributors to MoneyShow.com have taken a long-term view and offer their favorite recommendations in the chip space.
Our investing goal is to get in front of burgeoning, revolutionary trends that are in the sweet spot for long term growth. One such trend I have identified is the re-domestication of the supply chain. This onshoring revolution — for the lack of a better name — is real and is going to be worth trillions of dollars for investors in the next decade and we want to continue to figure out the best places to get in front of this trend.
Currently, the boards at every company on the planet that sources anything from China or the Middle East or Taiwan are talking about how they can bring as much of their supply chains and their factories and their logistics to their home country as possible. That means hundreds of corporations are going to spending trillions of total dollars building factories, distribution networks, and other supply chain services and products in the next decade.
My favorite stock for this onshoring revolution is Intel (INTC). It is the only company on the planet that can help the US and Europe try to create their own chip supply chains. The company will let governments pay for most of the fabs and they could be a monopoly in the West in the single most important supply chain for our economy — making chips.
I’d also mention that the company could be taking market share for the first time in a decade. If so, will probably keep taking share for the next decade. It is also trading at less than 7x 3 years out profits, less than 10x next year’s estimates. And, it has as a rock star CEO that nobody wants to respect.
Looking at Intel’s latest quarter, I think the PC business is shrinking as millions of people in silicon valley and at tech startups around the world have lost their jobs and the companies they worked at now have millions of extra PC computers that they just bought in the last two years laying around.
Apple’s Mac business was down 13% year over year, for example. That said, the problem with a big miss like Intel had on earnings is that we have to question and/or lower our earnings estimates for the next few quarters.
Despite this short-term concern, Intel has a leadership position in a market with a potential trillion-dollar business kicker — although we recognize that it will take at least another couple of years for the markets to believe in them.
Yes, the INTC quarterly report was ugly. But I’m not changing my stance — I still have the same conviction that Intel is probably going to become a trillion-dollar semiconductor fab business in ten years. I’ve said all along that I’d buy near $30 if we get the chance. I’m sitting tight for now, as the upside potential is still there.
My latest recommendation is the deeply undervalued computer chip company Alpha and Omega Semiconductor Inc. (AOSL) to our portfolio. The stock initially fell after it was announced that outlook for the computer chip market had lost steam. But since then, the stock has rallied sharply and is now profitable.
Indeed, the stock has skyrocketed 40% in the past month. Investors finally realized how deeply undervalued it was. But it’s still selling for only 8.1 times forward earnings, a huge discount from the semiconductor industry (15.2).
Based in Sunnyvale, California, Alpha and Omega is a perfect way to take advantage of the computer chip market. AOSL is a chipmaker for use in smart phone chargers, battery packs, notebooks, desktop and servers, data centers, base stations, graphics card, game boxes, TVs, alternate current (AC) adapters, power supplies and tools, e-vehicles, UPS systems, solar inverters and industrial welding.
Its business looks strong, with sales growth accelerating 41% in 2021 to $761 million. The company went from losing $6.6 million in 2020 to a gain of $450 million in 2022. Profit margins exceed 60% and return on equity (ROE) is 70%.
The company has $323 million in cash and hardly any debt ($96 million). So far, the company does not pay a dividend, but it could in the future.
Keep buying. AOSL reports on August 10 and is expecting a quarterly revenue of $190 million, up 7.2% from a year ago. As we look into the future, I’m bullish on the stock and think it has strong upside potential. In fact, my one-year target for AOSL is $58 a share.
Our latest Focus Stock is Marvell Technology Group (MRVL), which carries our highest investment recommendation of 5-STAR
We view MRVL as being the least exposed to the consumer (less than 15% of sales in areas like PC/gaming) after smart acquisitions/asset sales in recent years, positioning it to benefit from secular prospects tied to key infrastructure plays (cloud, 5G, and autos).
We think its robust pipeline within the cloud space (incremental $400 million in FY 23 and $800 million in FY 24) positions MRVL to take considerable wallet share and grow through a potential down chip cycle. We expect the easing of supply constraints and the shift towards 5nm/3nm offerings to be tailwinds for MRVL.
We believe that MRVL is the ultimate connectivity play within the chip space, with cloud continuing to be the source of its strength in the data center and biggest opportunity over the next three to five years.
Our 12-month target price of $60 is based on a P/E of 20.3x our CY 23 EPS estimate, above peers but well below its three- and five-year forward historical averages of 35.6x and 27.8x.
Photronics (PLAB) shares have surged 63% over the past 12 months, powered by the semiconductor-equipment company’s robust operating momentum. Per-share profits more than doubled for the 12 months ended April, while sales rose 21% and cash from operations increased 40%.
Encouraging news from Photronics customers suggest recent growth is sustainable. United Microelectroncs (17% of annual sales) said revenue for the month of June grew 43% and first-half sales were up 38%. Meanwhile, Samsung Electronics (12% of annual revenue) is considering expanding its manufacturing facilities in Texas, according to a July Bloomberg report.
The three-analyst consensus estimate calls for per-share profits to climb 113% to $1.90 for fiscal 2022 ending October on 23% sales growth. For the July quarter, Photronics is expected to post 79% profit growth on 23% higher sales. The stock trades at just 12 times estimated current-year profits, an 34% discount to its industry average. Photronics is a “Best Buy”.
Lam Research (LRC
Lam posted fiscal Q4 EPS of $8.83, crushing expectations of $7.26, while revenue of $4.63 billion also came in well ahead of the consensus. The highest in Lam’s history, revenue was driven by strong results from foundry logic systems and customer service business segments, as well as operational success maneuvering around supply chain constraints.
LRCX expects robust semiconductor demand with few pockets of weak- ness, expanding semiconductor usage, rising device complexity and larger die sizes. Lam spent $868 million on share repurchases last quarter and paid $208 million in dividends. For the current quarter, LRCX expects $4.9 billion of revenue (+/- $300 million) and $8.75 to $10.25 of EPS. With a forward P/E ratio less than 14, the volatile share price (off 30% this year) offers a nice entry point.
Despite reporting fiscal Q3 top- and bottom-line results that were better than expectations, semiconductor designer Qualcomm (QCOM) saw its shares fall as concerns about weakening global mobile phone demand and lowered Q4 guidance took their toll.
The company reported adjusted EPS of $2.96 on revenue of $10.94 billion, versus the respective consensus estimates of $2.87 and $10.87 billion. Q4 guidance was weaker than expected with revenue at $11.4 billion, vs. the Street’s $11.9 billion expectation and EPS of $3.15, vs. the $3.26 consensus.
Nevertheless, we were pleased to see QCOM’s robust outlook and expect to see continued execution momentum. Shares have slumped more than 23% this year, but we think the prospects for the company are bright, especially as high-quality chips are difficult to find. We were also happy to see a new agreement with Samsung, which expands Qualcomm’s chipset market share within Gala
The deflating handset demand is a near-term risk, but we believe it is already reflected in expectations (with shares off 25% since early-January highs) and we remain confident in the company’s long-term revenue opportunities and diversification strategy beyond handsets. QCOM shares change hands at 11.5 times next 12-month adjusted EPS and offer a 2.1% dividend yield. Our target price has been adjusted to $224.
As the digitization-of-everything trend accelerates, chip maker Analog Devices (ADI) is positioned to be a leader, holding the top position in analog, mixed signal and radio-frequency (RF) semiconductors and the number two position in power management chips.
Analog’s recent strength was due to a major Wall Street bank giving the firm its top ranking among semiconductor companies, noting the firm’s “defensive stance” in the face of weakening demand for PCs and cell phones.
Before that, another major bank named Analog its favorite chip stock, stating its belief the company has eclipsed Texas Instruments as the leading analog chip maker based on its “accelerating” free cash flow.
Another driving force behind Analog’s rebound is the recent passage of federal legislation designed to increase domestic chip manufacturing and make the industry more competitive with China (the bill provides $52 billion in subsidies to the industry, plus another $24 billion in investment tax credits to chip facilities).
And finally, we have China’s reopening after its strict Covid-related lockdown measures earlier this summer, which at least one analyst believes will goose results in the quarters to come.
When the company reports Q3 earnings on August 17, analysts expect revenue of $3 billion (up 74% from a year ago if realized) and per-share earnings of $2.43 (up 40%), and while growth should slow next year, management sees a path to $15 of annual EPS (up from an estimated $9.21 this year) and a whopping 40% free cash flow margin (which will lead to big shareholder returns).
ADI has moved persistently higher back above its 200-day line (which capped the March and May rallies) and near six-month highs. We’re fine buying a little here or on minor weakness. A 1.8% dividend yield—plus a 19-year string of annual payout increases — is also a plus.
Meanwhile, the chip shortage has spawned a tidal wave of private and public sector money to increase capacity. A leader in the electronic design segment of the chip industry is Cadence (CDNS), which provides software, hardware and internet protocol that turn design concepts into reality.
Beyond chip makers, its clientele is quite extensive and includes major players in the automotive, aerospace, healthcare and telecom spaces. But semiconductors are the main story right now, as many firms in that industry rely on Cadence’s software to design and test their chips.
The recent Q2 report underlined the company’s belief that the mega-trend in semiconductors and convergence of system and chip designs will prompt more companies to increase investments in silicon for years to come, constantly widening its customer base.
To that end, Cadence just acquired OpenEye Scientific — a molecular modeling software provider that will extend its system design and computational software strategy into the life sciences market. Cadence also recently bought Future Facilities, which will expand its footprint in the data center design space.
On the financial front, Cadence is a model of consistency, with earnings up at least six years in a row, and in Q2, the firm delivered double-digit growth across all product categories, with Q2 revenue of $857 million increasing 18% from a year ago, while per-share earnings of $1.08 were up 26% and beat estimates by 11 cents.
Going forward, Cadence expects the growth to continue, guiding for sales of around $870 million in Q3 (up 16% if realized and in-line with estimates), with earnings of 96 cents per share expected (up 20%).
It has been a rocky ride for CDNS in the past year. However, the stock found support in May, with shares now attacking their old high. A pullback here is likely, so if you want in, aim for dips of a few points.