The chip industry is set for robust growth due to increased demand for consumer electronics like mobile phones and PCs and supportive government policies for domestic chip manufacturing. Additionally, specialized chips for generative AI, IoT, and 5G technologies are expected to drive significant industry expansion, creating favorable investment opportunities.
Given this backdrop, investors could consider buying fundamentally strong chip stocks STMicroelectronics N.V. (STM), ASE Technology Holding Co., Ltd. (ASX), and Photronics, Inc. (PLAB) for solid gains.
The Semiconductor Industry Association (SIA) announced that global semiconductor sales in February 2024 hit $46.2 billion, marking a 16.3% surge from February 2023. This growth was fueled by the extensive utilization of chips in sectors such as healthcare and manufacturing. The growing demand for high-performance chips in consumer electronics will propel the sector's growth.
Moreover, the industry looks well-positioned to benefit from increased interest in AI chips, rising demand for GPUs in data centers, and increased semiconductor content per vehicle. The global semiconductor market is projected to grow 16.6% year-over-year to $617 billion this year. Furthermore, investors’ interest in chip stocks is evident from the VanEck Semiconductor ETF’s (SMH) 72.5% returns over the past year.
Considering these conducive trends, let’s analyze the fundamentals of the three Semiconductor & Wireless Chip picks, beginning with the third choice.
Stock #3: STMicroelectronics N.V. (STM)
Headquartered in Geneva, Switzerland, STM and its subsidiaries design, develop, manufacture, and sell semiconductor products in Europe, the Middle East, Africa, the Americas, and the Asia Pacific. The company operates through the Automotive and Discrete Group, Analog, MEMS, and Sensors Group, and Microcontrollers and Digital ICs Group segments.
On April 11, 2024, STM and Centrica Energy signed a 10-year Power Purchase Agreement (PPA) for renewable energy supply in Italy starting January 2025. This supports STM's goal of carbon neutrality and 100% renewable energy sourcing by 2027.
On April 9, 2024, STM announced the ST25R100 NFC reader, offering high performance, low power consumption, and affordability for integrating various consumer and industrial devices, enabling enhanced contactless interaction experiences.
In terms of the trailing-12-month EBITDA margin, STM’s 36.57% is 285.4% higher than the 9.49% industry average. Likewise, its 23.05% trailing-12-month net income margin is 779% higher than the 2.62% industry average. Furthermore, the stock’s 25.68% trailing-12-month Capex / Sales is considerably higher than the 2.33% industry average.
STM’s net revenue for the fiscal year ended December 31, 2023, increased 7.2% year-over-year to $17.29 billion. Its gross profit rose 8.5% from the year-ago value to $8.29 billion. Its operating income stood at $4.61 billion, up 3.9% year-over-year. In addition, the company’s net income and EPS came in at $4.21 billion and $4.46, up 6.3% and 6.4% over the previous year’s quarter, respectively.
For fiscal 2025, STM’s EPS and revenue are expected to increase 23.2% and 8.7% year-over-year to $3.74 and $17.58 billion, respectively. It surpassed the consensus EPS estimates in three of the trailing four quarters. Over the past six months, the stock has declined 5.3% to close the last trading session at $40.64.
STM’s POWR Ratings reflect a favorable outlook. It has an overall rating of B, which translates to a 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 Value and a B for Quality. It is ranked #10 out of 91 stocks in the Semiconductor & Wireless Chip industry. To access the additional grades of STM for Growth, Momentum, Stability, and Sentiment ratings, click here.
Stock #2: ASE Technology Holding Co., Ltd. (ASX)
Headquartered in Kaohsiung, Taiwan, ASX and its subsidiaries provide semiconductor packaging, testing, and electronic manufacturing services in the United States, Taiwan, Asia, Europe, and internationally.
On March 20, 2024, ASX announced the extension of its VIPack platform's advanced interconnect technology, reducing chip-on-wafer interconnect pitch from 40um to 20um using microbump technology, catering to the increasing demand for complex chiplet integration in AI applications.
In terms of the trailing-12-month net income margin, ASX’s 5.45% is 107.9% higher than the 2.62% industry average. Likewise, its 4.76% trailing-12-month Return on Total Assets is 219.1% higher than the industry average of 1.49%. Its 10.59% trailing-12-month Return on Common Equity is 190.6% higher than the industry average of 3.64%.
ASX’s total net revenues for the fiscal fourth quarter that ended December 31, 2023, increased 4.2% year-over-year to NT$160.58 billion ($4.96 billion). The company’s operating income grew 3.6% year-over-year to NT$11.81 billion ($364.43 million). Its net income attributable to ASX and EPS came in at NT$9.39 billion ($289.75 million) and NT$2.13, up 7% and 6.5% over the prior-year quarter, respectively.
Street expects ASX’s EPS for the quarter ended March 31, 2024, to increase 11.4% year-over-year to $0.10. Its revenue for the quarter ending September 30, 2024, is expected to increase 10.8% year-over-year to $5.26 billion. It surpassed the Street EPS estimates in three of the trailing four quarters. Over the past year, the stock has gained 47.2% to close the last trading session at $10.83.
ASX’s POWR Ratings reflect its robust fundamentals. It has an overall rating of B, which translates to a Buy in our proprietary rating system.
It has an A grade for Momentum and a B for Value. It is ranked #7 in the same industry. To see ASX’s Growth, Stability, Sentiment, and Quality ratings, click here.
Stock #1: Photronics, Inc. (PLAB)
PLAB and its subsidiaries manufacture and sell photomask products and services internationally. They offer photomasks used in the manufacture of integrated circuits and flat panel displays (FPDs) and in transferring circuit patterns onto semiconductor wafers and FPD substrates.
In terms of the trailing-12-month levered FCF margin, PLAB’s 13.24% is 44.5% higher than the 9.16% industry average. Its 28.37% trailing-12-month EBIT margin is 495.9% higher than the 4.76% industry average. Also, the stock’s 12.30% trailing-12-month Return on Total Capital is 400.6% higher than the 2.46% industry average.
For the fiscal first quarter that ended January 28, 2024, PLAB’s revenue increased 2.5% year-over-year to $216.33 million. Its operating income rose 2.7% from the year-ago value to $57.49 million. Also, the company’s non-GAAP net income and non-GAAP EPS rose 22.7% and 20% over the prior-year quarter to $29.91 million and $0.48, respectively.
Analysts expect PLAB’s EPS for the quarter ending April 30, 2024, to increase 1.9% year-over-year to $0.55. Its revenue for the same quarter is expected to increase marginally year-over-year to $231 million. Over the past year, the stock has gained 74.4% to close the last trading session at $27.29.
PLAB’s POWR Ratings reflect strong prospects. It has an overall rating of B, translating to a Buy in our proprietary rating system.
It has an A grade for Momentum and a B for Value and Quality. It is ranked #6 in the Semiconductor & Wireless Chip industry. In total, we rate PLAB on eight different levels. Beyond what we stated above, we also have given PLAB grades for Growth, Stability, and Sentiment. Get all the PLAB’s ratings here.
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STM shares were trading at $40.28 per share on Tuesday morning, down $0.36 (-0.89%). Year-to-date, STM has declined -19.56%, versus a 6.55% rise in the benchmark S&P 500 index during the same period.
About the Author: Abhishek Bhuyan
Abhishek embarked on his professional journey as a financial journalist due to his keen interest in discerning the fundamental factors that influence the future performance of financial instruments.
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