Zacks Investment Research | Jan 17, 2022 03:37AM ET
While supply constraints impacting some players are likely to continue through much of this year, the strong demand environment is leading to price increases and long-term supply agreements (for some).
The longer-lasting impact of the pandemic is overwhelmingly positive for the industry because it provides the building blocks of technology that everyone is relying on for maintaining social distancing and remote operations.
Moreover, technological advancements in the way we do computing, as well as artificial intelligence, Internet of Things, 5G, driverless cars and a host of other things that will greatly increase our reliance on the digital world are secular drivers for the industry.
Therefore, there are huge prospects in this market and it’s a place we should all be in. Our current picks are Analog Devices (NASDAQ:ADI), Microchip Technology, Monolithic Power (NASDAQ:MPWR) Systems, NXP Semiconductors (NASDAQ:NXPI) and ON Semiconductor.
About The Industry
We generally use our electronic gadgets without thinking, expecting them to accurately read our commands, and record, store, retrieve and process the information we throw at them. The complex process that makes this possible is enabled by 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.
The industry is cyclical and prices are elastic. Given their application across automotive, communications, computing/cloud/data center, industrial, medical, IoT and other markets, these semiconductor suppliers serve multiple markets that offset their individual seasonality.
Factors Driving The Industry
Zacks Industry Rank Indicates Attractive Prospects
The Zacks Computer and Technology sector. It carries a Zacks Industry Rank #36, which places it at the top 14% of more than 250 Zacks-classified industries.
The group’s Zacks Industry Rank , which is basically the average of the Zacks Rank of all the member stocks, indicates attractive near-term prospects. 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.
The industry’s positioning in the top 50% of the Zacks-ranked industries is a result of positive earnings outlook for the constituent companies in aggregate. Looking at the aggregate earnings estimate revisions over the past year, it is clear that analysts are optimistic about this group’s earnings growth potential. So 2021 estimates have risen 31.9% over the past year, while 2022 estimates have risen 27.2%.
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 Is Average
The Zacks Semiconductor – Analog and Mixed industry has lagged the broader Zacks Computer and Technology Sector as well as the S&P 500 index though much of the past year. But it has pulled ahead of the broader sector in December.
Overall, the industry added 20.6% to its value over the past year while the broader sector added 18.0% and the S&P 500 24.6%.
One-Year Price Performance
Industry???'s Current Valuation
Although trading at a higher multiple than the S&P 500 on the basis of forward 12-month price-to-earnings (P/E) ratio, it is 7.3% below its own median value over the past year. The S&P 500 is trading at a lower multiple but is only 2.8% below its median level. So now, the industry’s multiple is 23.24X while to the S&P 500’s 21.26X. It is however slightly undervalued compared to the sector’s forward-12-month P/E of 27.13X.
The industry is currently trading at its lowest point of 25.08X over the past year. Its highest point over the past year is 26.77X.
Forward 12 Month Price-to-Earnings (P/E) Ratio
5 Promising Stocks Offering Exposure To The Industry
Analog Devices (ADI): The company’s integrated circuits offer small form factor, low-power, radio-frequency (RF) analog and mixed signal semiconductor products including converters, power management products, amplifiers, RF and microwave ICS, accelerometers, gyroscopes and a host of other products, primarily targeted at the industrial, automotive, consumer, instrumentation, aerospace, and communications markets.
Analog Devics has benefited from strength in the industrial and automotive markets, which reached all-time highs in fiscal 2021 (ending October). High-end consumer also delivered strong growth. The Maxim acquisition brought engineering talent and also expanded the product portfolio. Given the level of demand, Analog Devices is adding capacity, which should support its future growth.
Analog Devices beat estimates by 2.4% in the last quarter. Its fiscal 2022 EPS estimate has increased 37 cents (5.2%) in the last 60 days while the 2023 estimate increased 30 cents (3.8%).
Shares of this Zacks Rank #1 (Strong Buy) stock are up 9.0% in the past year.
Price and Consensus: ADI
Microchip Technology Incorporated (NASDAQ:MCHP): Microchip develops and manufactures microcontrollers, memory and analog and interface products for embedded control systems, which are small, low-power computers designed to perform specific tasks.
The company’s revenues stagnated through 2020 but have picked up strongly since then. It is currently seeing particular strength in the automotive, industrial and consumer markets, which are seeing above-seasonal strength. Low channel inventories and supply constraints are raising some material and subcontracting costs while high demand is allowing price increases. Despite extension of capacity, the exceptionally high demand is allowing the company to build backlog extending well beyond the current quarter. Moreover, most of the backlog, especially in constrained areas, is coming through its Preferred Supply Program, which further improves visibility. It is also refinancing its debt on more favorable terms while extending maturities. Management continues to increase the dividend.
The company performance in the last quarter was more or less in line with the Zacks Consensus Estimate and the estimate for fiscal 2022 (ending March) increased a couple of cents in the last 60 days. The 2023 estimate increased 6 cents in the same time period.
The shares of this Zacks Rank #2 (Buy) company are up 13.4% over the past year.
Price and Consensus: MCHP
Monolithic Power Systems (MPWR): The company designs, develops, and markets integrated power semiconductor solutions and power delivery architectures for computing and storage, automotive, industrial, communication, and consumer applications markets.
Monolithic Power has not felt any negative impact from the pandemic at all. In fact, being a semiconductor company, it has been one of the enablers of the digital economy that supported the economy during this time. As a result, the company has seen particularly strong revenue growth from the June quarter of 2020. It has also benefited from its long-term customer relationships and share gains, particularly in higher-margin categories. This is helping the company to absorb the rising costs without much impact on its bottom line.
Monolithic Power topped estimates by 3.0% in the last quarter. Its 2021 EPS estimate has increased 10 cents (1.4%) in the last 90 days. Additionally, its 2022 estimate increased 33 cents (4.0%).
Shares of this Zacks Rank #2 stock are up 15.5% over the past year.
Price and Consensus: MPWR
NXP Semiconductors N.V. (NXPI): The company offers microcontrollers, application processors, communication processors, wireless connectivity solutions, analog and interface devices, RF power amplifiers, security controllers, and semiconductor-based environmental and inertial sensors, including pressure, inertial, magnetic, and gyroscopic sensors. Its products are primarily targeted at the automotive, industrial, IoT, mobile and communication infrastructure markets.
The strong demand NXPI is currently seeing is expected given its significant exposure to auto and industrial end markets. The company has prepared to ship higher volumes given the constrained environment and expects the situation to generate additional revenue through this year.
NXP beat estimates by 2.9% in the last quarter. The Zacks Consensus Estimate for 2021 has jumped 27 cents (2.6%) in the last 90 days. The 2022 estimate jumped 55 cents (4.8%) during the same period.
#2 ranked NXP shares are up 30.8% over the past year.
Price and Consensus: NXPI
ON Semiconductor Corporation (ON): The company is an original equipment manufacturer (OEM) of a broad range of discrete and embedded semiconductor components, including power management, logic, signal processing, memory and application specific integrated circuits (ASICs). It also offers foundry services. It serves players in the automotive, industrial, medical, aerospace/defense, communications, networking, wireless, consumer, and computing markets
The company is another beneficiary of the current strength in the automotive and industrial markets, both of which are in the middle of a strong growth phase. Additionally, its highly differentiated power management solutions have enabled it to generate new design wins and market share gains. With auto customers entering into long-term supply agreements, the company stands to benefit from the improving visibility and better asset allocation. On Semi is also well positioned to capitalize on the emerging EV opportunity, as well as the rapidly expanding alternative energy market (mainly solar farms).
ON Semi (NASDAQ:ON) beat September quarter estimates by 17.6% after which the 2021 estimates for this Zacks Rank #2 company increased 32 cents (12.9%). The 2022 estimate increased 51 cents (18.4%).
The shares are up 80.4% over the past year.
Price and Consensus: ON
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