The semiconductor sector lies at the core of technological progress, serving as a vital element in a diverse array of devices, encompassing smartphones, computers, automotive systems, and Internet of Things (IoT) devices. This versatile utility ensures a positive long-term outlook and is resilient in the face of short-term market fluctuations.
Given the promising backdrop, three fundamentally sound chip stocks, Cohu, Inc. (COHU), Broadcom Inc. (AVGO), and Everspin Technologies, Inc. (MRAM), appears better equipped to capitalize on the industry’s prospects than industry leader Intel Corporation (INTC). Let us understand why.
INTC, the world's leading semiconductor technology company, reported second-quarter results that exceeded expectations, indicating a return to profitability after enduring two consecutive quarters of losses. However, its net revenue reached $12.95 billion, down 15.5% versus $15.32 billion in the prior-year quarter. This marks the sixth consecutive quarter of declining sales.
David Zinsner, INTC’s financial chief, noted that one contributing factor to the stronger-than-expected report was the significant progress the company has achieved in reducing costs by $3 billion this year. INTC’s CEO Pat Gelsinger indicated that the company anticipates “persistent weakness” in all segments of its business until the end of the year, with server chip sales not expected to rebound until the fourth quarter.
Furthermore, the company's profitability falls short of the industry average. For instance, INTC’s trailing-12-month gross profit margin of 38.27% is 21.6% lower than the 48.82% industry average. While its trailing-12-month asset turnover ratio of 0.30x is 50.8% lower than the industry average of 0.62x.
Despite grappling with persistent challenges stemming from prevailing macroeconomic conditions, exerting short-term pressure on the sector, the semiconductor industry exhibits promising long-term growth potential.
Projections suggest an 11.2% decline in global semiconductor revenue for 2023. However, in 2024, semiconductor revenue is anticipated to experience a year-on-year growth of 18.5%, reaching $630.90 billion, indicating a solid rebound.
On top of it, expanding applications across sectors like data processing, networking, consumer electronics, industrial, automotive, and more are set to drive semiconductor market growth in the near future. The semiconductor market is poised for significant growth with a projected CAGR of 13.1% spanning 2022 to 2032.
Given the favorable industry prospects and an uncertain outlook for INTC, investors could consider buying COHU, AVGO, and MRAM instead. With that being said, let’s dive into the fundamentals of the featured Semiconductor & Wireless Chip picks, starting with number three.
Stock #3: Cohu, Inc. (COHU)
COHU provides semiconductor test equipment and services in China, the United States, Taiwan, Malaysia, the Philippines, and internationally. The company supplies semiconductor test and inspection handlers, micro-electromechanical system (MEMS) test modules, test contactors, thermal sub-systems, and semiconductor automated test equipment for semiconductor manufacturers and test subcontractors.
On January 30, COHU announced its acquisition of MCT Worldwide, LLC, a prominent provider of semiconductor test handler automation equipment. This strategic addition expands COHU's portfolio, encompassing strip, film-frame, and laser marking technologies.
Furthermore, this acquisition is anticipated to have a neutral impact on COHU’s financial results in the short term. It is projected to contribute positively, starting in 2024, once operational synergies are realized.
COHU’s trailing-12-month EBIT margin of 13.10% is 190.3% higher than the 4.51% industry average. Its trailing-12-month net income margin of 9.75% is 379.6% higher than the 2.03% industry average. Likewise, the stock’s trailing-12-month ROCE of 7.88% is 676.2% higher than the industry average of 1.01%.
For the fiscal second quarter, which ended on July 1, 2023, COHU’s net sales amounted to $168.92 million, while its non-GAAP income from operations stood at $29.91 million.
During the same period, the company’s non-GAAP net income came in at $22.84 million and $0.48 per share. Moreover, its total current liabilities amounted to $138.40 million, down 13.9% compared to $160.87 million as of December 31, 2022.
Analysts expect COHU’s revenue and EPS for the fiscal third quarter (ending September 2023) to be $150.10 million and $0.32, respectively. Also, the company’s EPS is projected to improve by 52.4% per annum over the next five years. Additionally, it surpassed the consensus EPS estimates in each of the trailing four quarters, which is impressive.
COHU’s revenue has grown at CAGRs of 9.5% and 14.9% over the past three and five years, respectively. While its levered FCF and EBITDA have improved at CAGRs of 35.7% and 58.8% over the past three years, respectively.
Over the past year, the stock has gained 28.9% to close the last trading session at $34.22.
COHU’s POWR Ratings reflect this promising outlook. The stock has an overall B rating, which translates to Buy in our proprietary rating system. The POWR Ratings assess stocks by 118 different factors, each with its own weighting.
It has an A grade for Momentum and a B for Value and Sentiment. In the 92-stock Semiconductor & Wireless Chip industry, it is ranked #18. To see additional ratings of COHU for Growth, Stability, and Quality, click here.
Stock #2: Broadcom Inc. (AVGO)
AVGO designs, develops, and supplies various semiconductor devices with a focus on complex digital and mixed signal complementary metal oxide semiconductor-based devices and analog III-V-based products worldwide. The company operates in two segments: Semiconductor Solutions and Infrastructure Software.
On August 31, AVGO declared a quarterly dividend of $4.60 per share, payable to its shareholders on September 29, 2023. The company’s annual dividend of $8.40 translates to a 2.22% yield on the current share price. While its four-year average dividend yield is 3.11%
Its dividend payouts have grown at CAGRs of 12.3% and 21.3% over the past three and five years, respectively. Also, it has a record of 12 years of consecutive dividend growth.
On July 12, AVGO received conditional approval from the European Commission to complete its acquisition of VMware, Inc. (VMW). This decision acknowledges the significance of this merger in empowering businesses to enhance their presence in the multi-cloud environment, offering greater options to customers, and fostering the potential for heightened innovation and competition.
AVGO’s trailing-12-month ROCE of 64.57% is significantly higher than the industry average of 1.01%. Likewise, its trailing-12-month net income margin of 39.25% is significantly higher than the industry average of 2.03%. Furthermore, its trailing-12-month levered FCF margin of 38.97% is 440.9% higher than the industry average of 7.20%.
AVGO’s net revenue for the fiscal third quarter ended July 30, 2023, increased 4.9% year-over-year to $8.88 billion, while its adjusted EBITDA rose 7.9% from the year-ago value to $5.80 billion. In addition, the company’s non-GAAP net income and non-GAAP EPS improved 8.4% and 8.3% from the prior-year quarter to $4.60 billion and $10.54, respectively.
The consensus revenue estimate of $9.28 billion for the fiscal fourth quarter (ending October 2023) reflects a 3.9% rise year-over-year. The consensus EPS estimate of $10.95 for the current quarter indicates a 4.8% year-over-year improvement. Moreover, the company has an excellent surprise history, surpassing the revenue and EPS estimates in each of the trailing four quarters.
Over the past three years, AVGO’s revenue and EBITDA have increased at CAGRs of 15.2% and 24.7%, respectively. Likewise, its net income and EPS have grown at CAGRs of 77.6% and 83.2% over the same period, respectively.
AVGO’s shares have surged 73.6% over the past year to close the last trading session at $829.08.
AVGO’s strong fundamentals are reflected in its POWR Ratings. It has an overall rating of B, which equates to Buy in our proprietary rating system.
It has an A grade for Quality and a B for Sentiment. Within the same industry, it is ranked #12. Click here to see AVGO’s ratings for Growth, Value, Momentum, and Stability.
Stock #1: Everspin Technologies, Inc. (MRAM)
MRAM is engaged in the manufacturing and sale of Magnetoresistive Random Access Memory (MRAM) products and solutions. Its offerings include Toggle MRAM, spin-transfer torque MRAM, tunnel magnetoresistance sensor products, and foundry services for MRAM products.
The stock’s trailing-12-month net income margin of 11.65% is 472.9% higher than the 2.03% industry average. Moreover, the stock’s trailing-12-month EBIT margin of 7.77% is 72.2% higher than the industry average of 4.51%. Also, its trailing-12-month ROCE of 18.07% is significantly higher than the 1.01% industry average.
In the second quarter (ended June 30, 2023), MRAM’s total revenues increased 7.1% year-over-year to $15.75 million, while its gross profit grew 7% from the year-ago value to $9.19 million.
The company’s net income came in at $3.88 million and $0.18 per share, up 132.5% and 125% from the prior-year quarter, respectively. Also, its adjusted EBITDA stood at $5.43 million, representing an increase of 66.7% from the year-ago value.
Street expects MRAM’s revenue for the third quarter (ending September 30, 2023) to increase 4.3% year-over-year to $15.90 million. Its EPS is expected to be $0.15 in the same period and increase by 20% annually over the next five years. Moreover, the company topped the consensus revenue and EPS estimates in each of the trailing four quarters, which is promising.
Additionally, MRAM’s revenue has grown at CAGRs of 14.7% and 6.6% over the past three and five years, respectively. While its total assets have improved at a CAGR of 17.7% over the past three years.
The stock has surged 68.9% year-to-date and 76.5% over the past nine months to close the last trading session at $9.39.
It’s no surprise that MRAM has an overall rating of B, which equates to Buy in our proprietary rating system. It has an A grade for Sentiment and a B for Value and Quality. Out of 92 stocks in the same industry, it is ranked #2.
In addition to the POWR Ratings we’ve stated above, we also have MRAM’s ratings for Growth, Momentum, and Stability. Get all MRAM ratings here.
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AVGO shares were trading at $830.91 per share on Monday afternoon, up $1.83 (+0.22%). Year-to-date, AVGO has gained 51.29%, versus a 13.97% rise in the benchmark S&P 500 index during the same period.
About the Author: Anushka Mukherjee
Anushka's ultimate aim is to equip investors with essential knowledge that empowers them to make well-informed investment choices and attain sustained financial prosperity in the long run.
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