The semiconductor industry’s long-term growth prospects remain optimistic because of the increasing use of chips in powering technological advancements. This trend is driven by the growing demand for electronics in various sectors, such as automotive, healthcare, and telecommunications.
Given the industry’s solid growth prospects, investors could consider buying fundamentally sound chip stocks such as Park Aerospace Corp. (PKE), Sumco Corporation (SUOPY), and STMicroelectronics N.V. (STM) for solid returns.
Before delving deeper into their fundamentals, let’s discuss what’s happening in the tech industry.
The semiconductors market is expected to be worth $70.18 billion in revenue by 2023. Integrated Circuits dominate the industry, with an estimated market volume of $59.23 billion in 2023. Revenue is predicted to grow at a 5.7% CAGR, reaching $87.43 billion by 2027.
The growth can be attributed to rising demand for electronic devices and technological improvements. Also, the growing use of IoT and AI applications across many industries will likely fuel semiconductor demand in the coming years.
The Semiconductor Industry Association (SIA) reported global sales in July 2023 reached $43.20 billion, a 2.3% increase month-over-month. The semiconductor sector continues to play an important role in pushing technical developments and innovation around the world.
Investors’ interest in chip stocks is evident from the VanEck Vectors Semiconductor ETF’s (SMH) 9.3% returns over the past six months.
In light of these encouraging trends, let’s look at the fundamentals of the three top-rated Semiconductor & Wireless Chip stocks, beginning with number 3.
Stock #3: Park Aerospace Corp. (PKE)
PKE specializes in developing and manufacturing advanced composite materials for the aerospace market in North America, Asia, and Europe. Its offerings include film adhesives, lightning strike protection materials, specialty ablative materials for rocket motors, and materials for radome applications. It also designs and fabricates various composite parts, structures, and assemblies.
PKE’s trailing-12-month net income margin of 18.79% is 202.5% higher than the industry average of 6.21%. Its trailing-12-month EBIT margin of 17.09% is 75.5% higher than the 9.74% industry average.
During the fiscal 2024 first quarter ended May 28, 2023, PKE’s sales were $15.55 million, up 21.7%year-over-year. Its gross profit increased 18.1% from the year-ago value to $4.83 million. The company’s adjusted EBITDA grew 18.1% from the prior-year quarter to $3.31 million.
PKE’s shares have gained 50.5% over the past year to close the last trading session at $15.59.
PKE’s POWR Ratings reflect this promising outlook. The stock has an overall rating of B, equating to a Buy in our proprietary rating system. The POWR Ratings assess stocks by 118 different factors, each with its own weighting.
PKE also has a B grade for Momentum and Quality. It is ranked #11 out of 91 stocks in the Semiconductor & Wireless Chip industry. Click here for the additional POWR Ratings for Sentiment, Stability, Value, and Growth for PKE.
Stock #2: Sumco Corporation (SUOPY)
Headquartered in Tokyo, Japan, SUOPY manufactures and sells silicon wafers for the semiconductor industry worldwide. It provides monocrystalline ingots, as well as polished, annealed, epitaxial, junction isolated, silicon-on-insulator, and reclaimed polished wafers.
SUOPY’s forward Price/Sales multiple of 1.60 is 36.5% lower than the industry average of 2.52. Its forward EV/EBIT multiple of 10.71% is 39.6% lower than the industry average of 17.71.
SUOPY’s trailing-12-month CAPEX / Sales of 45.89% is significantly higher than the 2.42% industry average. Its trailing-12-month ROCE of 16.33% is significantly higher than the 1.16% industry average.
For the half year that ended June 30, 2023, SUOPY’s net sales increased 13.2% year-over-year to ¥220.60 billion ($1.51 billion). The company’s operating income amounted to ¥46.70 billion ($319.50 million). Its net income attributable to owners of the parent increased 18.3% year-over-year to ¥49.60 billion ($339.34 million).
Street expects SUOPY’s revenue to increase 3.4% year-over-year to $2.89 billion for the year ending December 2023. Over past year the stock has gained 8.1% to close the last trading session at $26.59.
SUOPY’s strong fundamentals are reflected in its POWR Ratings. The stock has an overall rating of B, which equates to a Buy in our proprietary rating system.
It is ranked #8 in the same industry. It has an A grade for Momentum and Stability and a B for Value. To see additional SUOPY’s ratings for Growth, Sentiment, and Quality, click here.
Stock #1: STMicroelectronics N.V. (STM)
Headquartered in Geneva, Switzerland, STM, and its subsidiaries design, develops, 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.
STM’s forward non-GAAP P/E of 9.71x is 54.6% lower than the 21.40x industry average. Its forward EV/EBIT multiple of 7.81 is 55.9% lower than the 17.71 industry average.
STM’s trailing-12-month net income margin of 27.45% is significantly higher than the industry average of 2.03%. Its trailing-12-month ROCE of 38.55% is significantly higher than the 1.16% industry average.
STM’s net sales for the second quarter ended July 1, 2023, increased 12.7% year-over-year to $4.33 billion. Its gross profit rose 16.5% year-over-year to $2.12 billion. Its operating income increased 14.1% year-over-year to $1.15 billion.
The company’s net income attributable to common stockholders rose 15.4% year-over-year to $1 billion. In addition, its EPS came in at $1.06, representing an increase of 15.2% year-over-year.
Analysts expect STM’s revenue to increase 7.9% year-over-year to $17.41 billion for the year ending December 2023. It is expected to grow 3.3% year-over-year to $4.33 for the same period. It surpassed the EPS estimates in three of the four tailing quarters. The stock has gained 31.2% over the past year to close the last trading session at $42.06.
It’s no surprise that STM has an overall B rating, equating to a Buy in our POWR Ratings system. It has a B grade for Value, Sentiment, Momentum and Quality. It is ranked #3 in the same industry.
Beyond what is stated above, we’ve also rated STM for Growth, and Stability. Get all STM ratings here.
What To Do Next?
43 year investment veteran, Steve Reitmeister, has just released his 2024 market outlook along with trading plan and top 11 picks for the year ahead.
STM shares were trading at $42.99 per share on Wednesday morning, up $0.93 (+2.21%). Year-to-date, STM has gained 21.26%, versus a 11.33% rise in the benchmark S&P 500 index during the same period.
About the Author: Rashmi Kumari
Rashmi is passionate about capital markets, wealth management, and financial regulatory issues, which led her to pursue a career as an investment analyst. With a master's degree in commerce, she aspires to make complex financial matters understandable for individual investors and help them make appropriate investment decisions.
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