The semiconductor’s ever-evolving role is coming to the fore, anchoring their significance in various sectors like consumer electronics, healthcare, automotive, telecommunications, data centers, and defense. Amid relentless tech innovations, the surging demand for cutting-edge, efficient chips fuels a stand-out expansion in the semiconductor industry.
Given the industry’s promising outlook, in this piece, we evaluate three chip stocks to shed light on how they can help an investor capitalize on the prevailing industry tailwinds.
A solid buy candidate for 2024 appears to be ChipMOS TECHNOLOGIES INC. (IMOS), given its robust fundamentals. Conversely, I think Texas Instruments Incorporated (TXN) should be kept on one's watchlist for better entry opportunities, while Wolfspeed, Inc. (WOLF) should be best avoided, given its weak fundamentals.
Let’s first look at what’s shaping the semiconductor industry before delving deeper into the fundamentals of the three stocks.
In the quarters after the pandemic, the semiconductor industry has grappled with fluctuations influenced by factors like supply chain disruptions, escalating geopolitical tensions, and evolving consumer preferences. Despite such tribulations, the industry has showcased commendable buoyancy. The long-term trend over the past two decades uncovers consistent escalation, with annual sales leaping from $139 billion in 2001 to an impressive $573.5 billion in 2022 – a substantial 313% increase.
The Semiconductor Industry Association (SIA) released data indicating a 3.9% month-over-month increase in global semiconductor sales in October 2023. A robust resurgence in the worldwide semiconductor market is expected to follow in 2024. Gartner predicts a 16.8% growth in global semiconductor revenue for the year, totaling $624 billion, propelled by a double-digit expansion in the memory market. In concurrence, the World Semiconductor Trade Statistics’ (WSTS) projections reveal a 13.1% surge, taking the total up to $588 billion.
Moreover, the burgeoning prevalence of AI-integrated devices and applications plays a pivotal role in the escalating growth of the wireless chipset market. A broad-based incorporation of AI algorithms and ML techniques into an extensive range of devices like smartphones, intelligent home appliances, and industrial sensors, stands as a primary impetus for this expansion.
Government interventions, such as the CHIPS and Science Act, further fortify the semiconductor industry's prospects. The Act sets aside approximately $53 billion towards bolstering semiconductor manufacturing, research, and the creation of a skilled workforce in the U.S.
Considering these trends, let's take a look at the fundamentals of the three Semiconductor & Wireless Chip stocks, starting with the weakest from the investment point of view.
Stock #3: Wolfspeed, Inc. (WOLF)
WOLF focuses on silicon carbide and gallium nitride (GaN) technologies in Europe, Hong Kong, China, the rest of Asia-Pacific, the U.S., and internationally.
On December 4, 2023, WOLF sold its radio frequency business (Wolfspeed RF) to MACOM Technology Solutions Holdings, Inc., effective December 2, 2023. WOLF received approximately $75 million in cash, subject to a customary purchase price adjustment, and 711,528 shares of MACOM common stock, which had a market value of roughly $60.80 million based on the closing price for MACOM’s common stock on December 1, 2023.
WOLF’s trailing-12-month asset turnover ratio of 0.17x is 73.1% lower than the industry average of 0.62x, while its trailing-12-month gross profit margin of 25.43% is 48.2% lower than the industry average of 49.14%.
For the fiscal first quarter that ended September 24, 2023, WOLF’s revenue stood at $197.40 million, while its non-GAAP gross profit stood at $30.70 million, down 58.2% year-over-year. Moreover, its non-GAAP operating loss came to $72.30 million, up 75.1% from the year-ago quarter.
For the same quarter, its non-GAAP net loss came to $66.60 million, up 121.3% year-over-year, while non-GAAP loss per share increased 120.8% year-over-year to $0.53. As of September 24, 2023, WOLF’s total current liabilities stood at $756.30 million, compared to $627.80 million as of June 25, 2023.
Street expects WOLF’s revenue and EPS in the fiscal second quarter (ended December 2023) to be $206.67 million and negative $0.63, down 4.4% and 476.4% year-over-year, respectively.
The stock has declined 43.6% over the past year to close the last trading session at $39.58. Over the past nine months, it has declined 33.5%.
WOLF’s bleak fundamentals are reflected in its POWR Ratings. The stock has an overall F rating, equating to a Strong Sell in our proprietary rating system. The POWR Ratings are calculated by considering 118 distinct factors, with each factor weighted to an optimal degree.
The stock has an F grade for Quality and a D for Growth, Value, Stability, and Sentiment. Within the Semiconductor & Wireless Chip industry, it is ranked last out of 91 stocks.
To see additional POWR Ratings for Momentum for WOLF, click here.
Stock #2: Texas Instruments Incorporated (TXN)
TXN designs, manufactures, and sells semiconductors to electronics designers and manufacturers in the U.S. and internationally. It operates in two segments: Analog and Embedded Processing.
On November 30, 2023, TXN expanded its low-power gallium nitride (GaN) portfolio, designed to help improve power density, maximize system efficiency, and shrink the size of AC/DC consumer power electronics and industrial systems.
TXN's overall portfolio of GaN field-effect transistors with integrated gate drivers addresses common thermal design challenges, keeping adapters cooler while pushing more power in a smaller footprint. TXN’s portfolio also addresses the growing demand for high-efficiency and compact designs in industrial systems such as power tools and server auxiliary power supplies.
On November 14, 2023, TXN paid stockholders a quarterly dividend of $1.30 per share of common stock. Its annualized dividend rate of $5.20 per share translates to a dividend yield of 3.16% on the current share price.
Its four-year average yield is 2.60%. TXN’s dividend payments have grown at CAGRs of 10.5% and 13.8% over the past three and five years, respectively. The company has a record of paying dividends for 34 consecutive years, reflecting upon the company’s strong cash generation ability.
TXN’s trailing-12-month cash from operations of $6.54 billion is significantly higher than the industry average of $76.24 million. Its trailing-12-month ROCE and ROTA of 45.37% and 22.44% are significantly higher than the industry averages of 1.27% and 0.31%, respectively.
For the fiscal third quarter that ended September 30, 2023, TXN’s revenue and gross profit stood at $4.53 billion and $2.82 billion, respectively. For the same quarter, its net income and earnings per common share stood at $1.71 billion and $1.85, respectively.
For the twelve months that ended September 30, 2023, its free cash flow stood at $1.65 billion. As of September 30, 2023, its total current assets came at $15.10 billion, compared to $13.77 billion as of September 30, 2022.
Street expects TXN’s revenue and EPS in the fiscal fourth quarter of 2023 (ended December 2023) to come at $4.13 billion and $1.49, respectively. The company surpassed consensus EPS estimates in each of the trailing four quarters and consensus revenue estimates in three of the trailing four quarters, which is impressive.
The stock has declined 8.8% over the past nine months but gained 4.5% over the past month to close the last trading session at $164.47.
TXN’s fundamentals are reflected in its POWR Ratings. The stock has an overall C rating, equating to Neutral in our proprietary rating system.
TXN has a B grade for Momentum and Quality. Within the same industry, it is ranked #49.
Beyond what we’ve stated above, we have also rated the stock for Growth, Value, Stability, and Sentiment. Get all ratings of TXN here.
Stock #1: ChipMOS TECHNOLOGIES INC. (IMOS)
Headquartered in Hsinchu, Taiwan, IMOS researches, develops, manufactures, and sells high-integration and high-precision integrated circuits, and related assembly and testing services. It operates through Testing; Assembly; Testing and Assembly for LCD, OLED and Other Display Panel Driver Semiconductors; Bumping; and Others segments.
Its annualized dividend rate of $1.50 per share translates to a dividend yield of 5.63% on the current share price. Its four-year average yield is 6.99%. IMOS’ dividend payments have grown at a 6.4% CAGR over the past three years.
IMOS’ trailing-12-month CAPEX/Sales of 16.48% is 596.5% higher than the industry average of 2.37%. Its trailing-12-month EBITDA and net income margins of 29.44% and 8.04% are 212.7% and 241% higher than the industry averages of 9.42% and 2.36%, respectively.
For the fiscal third quarter that ended September 30, 2023, IMOS’ revenue and gross profit increased 6.2% and 9.5% year-over-year to TWD5.58 billion ($179.59 million) and TWD889.08 million ($28.61 million), respectively.
For the same quarter, its profit for the period and earnings per share stood at TWD580.57 million ($18.68 million) and TWD0.80, respectively. As of September 30, 2023, IMOS’ total current assets stood at TWD20.08 billion ($645.96 million), compared to TWD16.01 billion ($515.06 million) as of September 30, 2022.
Street expects IMOS’ revenue in the fiscal fourth quarter (ended December 2023) to increase 12.4% year-over-year to $173.04 million. The company surpassed consensus revenue estimates in three of the trailing four quarters.
The stock has gained 25% over the past year to close the last trading session at $26.76. Over the past six months, it has gained 15.7%.
IMOS’ robust prospects are reflected in its POWR Ratings. The stock has an overall A rating, equating to a Strong Buy in our proprietary rating system.
IMOS has an A grade for Momentum and a B for Growth, Value, Stability, and Sentiment. It is ranked first within the same industry.
Click here for the additional POWR Ratings for IMOS (Quality).
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TXN shares were unchanged in premarket trading Friday. Year-to-date, TXN has declined -3.52%, versus a -1.69% rise in the benchmark S&P 500 index during the same period.
About the Author: Sristi Suman Jayaswal
The stock market dynamics sparked Sristi's interest during her school days, which led her to become a financial journalist. Investing in undervalued stocks with solid long-term growth prospects is her preferred strategy. Having earned a master's degree in Accounting and Finance, Sristi hopes to deepen her investment research experience and better guide investors.
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