The chip industry is set for sustained growth in this digital era due to the heightened demand for advanced chips across diverse sectors. Expanding applications and the growing use of emerging technologies boost the industry’s prospects.
However, Wolfspeed, Inc. (WOLF) is best avoided in the industry due to its poor fundamentals and growth prospects. While it could be wise to wait for a better entry point in Texas Instruments Incorporated (TXN), ASE Technology Holding Co., Ltd. (ASX) is well-positioned to benefit from the favorable industry trends.
Before diving deeper into the fundamentals of these stocks, let’s understand the industry landscape.
Chips are in huge demand across consumer electronics, defense, automotive, telecommunications, data centers, and healthcare industries. Despite a slowdown last year, chip sales reached record highs, emphasizing their critical role in today's diverse sectors.
In October, global semiconductor sales increased 3.9% sequentially, reaching $46.60 billion. The surge was fueled by the rising demand for advanced chips to power generative AI-based applications.
Gartner forecasts revenues from AI chips to increase 25.6% year-over-year to $67.10 billion in 2024. Moreover, AI chip revenue is expected to be more than double the market size in 2023, reaching $119.40 billion. This growth can be attributed to the demand for high-performance GPUs and optimized semiconductor devices for generative AI platforms.
On top of it, the semiconductor industry benefits from government policies, such as the CHIPS and Science Act, which allocated $53 billion for U.S. semiconductor industry development, including incentives for domestic chip manufacturing.
Investors’ interest in chip stocks is reflected in the VanEck Vectors Semiconductor ETF’s (SMH) 59.2% year-to-date return. The World Semiconductor Trade Statistics (WSTS) has projected that global semiconductor sales will rise 13.1% year-over-year to $588.40 billion in 2024.
Considering these trends, let’s analyze the fundamentals of the three Semiconductor & Wireless Chip stocks, beginning with the third in line from the investment point of view.
Stock #3: Wolfspeed, Inc. (WOLF)
WOLF is a powerhouse semiconductor company that focuses on silicon carbide and gallium nitride (GaN) technologies internationally. It offers silicon carbide and GaN materials, along with GaN epitaxial layers on silicon carbide wafers, to manufacture products for RF, power, and other applications.
In terms of the trailing-12-month gross profit margin, WOLF’s 25.43% is 47.8% lower than the 48.67% industry average. Likewise, its 138.74% trailing-12-month Capex/Sales is substantially lower than the industry average of 2.33%. Moreover, its 0.17x trailing-12-month asset turnover ratio is 73.1% lower than the industry average of 0.62x.
For the first quarter that ended September 24, 2023, WOLF’s net revenue came in at $197.40 million. Its non-GAAP gross profit decreased 58.2% year-over-year to $30.70 million. The company’s non-GAAP operating loss widened 75.1% over the prior-year quarter to $72.30 million.
In addition, its non-GAAP net loss and non-GAAP loss per share widened 121.3% and 120.8% year-over-year to $66.60 million and $0.53, respectively.
Analysts expect WOLF’s revenues for the quarter ending December 31, 2023, to decrease 4.5% year-over-year to $206.44 million, while its EPS for the same quarter is expected to remain negative. Over the past year, the stock has gained 51% to close the last trading session at $39.89.
WOLF’s weak fundamentals are reflected in its POWR Ratings. It has an overall rating of F, equating to a Strong Sell in our proprietary rating system. The POWR Ratings assess stocks by 118 different factors, each with its own weighting.
It 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 WOLF’s Momentum rating, click here.
Stock #2: Texas Instruments Incorporated (TXN)
TXN designs, manufactures, and sells semiconductors to electronics designers and manufacturers in the United States and internationally. It operates in two segments: Analog and Embedded Processing.
On November 2, 2023, TXN broke ground on its new 300-mm semiconductor wafer fabrication plant (LFAB2) in Lehi, Utah. The $11 billion investment is the state's most significant economic investment. LFAB2, operational by 2026, will create around 800 jobs. The expansion aligns with TI's commitment to long-term semiconductor manufacturing capacity planning.
Haviv Ilan, President, CEO, Chief Operating Officer, and Director at TXN, said, "Today, we take an important step in our company's journey to expand our manufacturing footprint in Utah. This new fab is part of our long-term, 300-mm manufacturing roadmap to build the capacity our customers will need for decades to come."
In terms of the trailing-12-month EBITDA margin, TXN’s 48.86% is 428.3% higher than the 9.25% industry average. Likewise, its 19.26% trailing-12-month Return on Total Capital is 615.2% higher than the industry average of 2.69%. Its 0.63x trailing-12-month asset turnover ratio is 1.6% higher than the industry average of 0.62x.
TXN’s revenues for the third quarter ended September 30, 2023, declined 13.5% year-over-year to $4.53 billion. Its operating profit decreased 29.4% over the prior-year quarter to $1.89 billion. Moreover, its net income and EPS decreased 25.5% and 25.1% year-over-year to $1.71 million and $1.85, respectively.
The company’s Embedded Processing revenue increased 8% over the prior-year quarter to $890 million. Its total current assets rose 9.6% year-over-year to $15.10 million.
Analysts expect TXN’s EPS and revenue for the quarter ending December 31, 2023, to decrease 31.8% and 11.5% year-over-year to $1.49 and $4.13 billion, respectively. It surpassed the consensus EPS estimates in each of the trailing four quarters. However, the stock has declined 9.3% over the past year to close the last trading session at $157.68.
TXN’s POWR Ratings reflect its bleak prospects. It has an overall rating of C, equating to a Neutral in our proprietary rating system.
It is ranked #42 in the same industry. It has a C grade for Value, Stability, and Sentiment. Click here to access the additional ratings of TXN for Growth, Momentum, and Quality.
Stock #1: 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.
In terms of the trailing-12-month net income margin, ASX’s 6.26% is 166.8% higher than the 2.35% industry average. Likewise, its 5.35% trailing-12-month Return on Total Assets is considerably higher than the industry average of 0.26%. Its 12.83% trailing-12-month Return on Common Equity is significantly higher than the industry average of 1.01%.
ASX’s total net revenues for the fiscal third quarter that ended September 30, 2023, came in at NT$154.17 billion ($4.90 billion). Its net income attributable to ASX and EPS came in at NT$8.78 billion (279.34 million) and NT$2, respectively. Its total current assets came in at NT$292.69 billion ($9.30 billion), compared to NT$271.03 billion ($8.61 billion) as of June 30, 2023.
Additionally, its net cash generated from operating activities rose 12.1% year-over-year to NT$20.88 billion ($663.20 million).
Street expects ASX’s EPS and revenue for the quarter ending March 31, 2024, to increase 50.1% and 3.8% year-over-year to $0.13 and $4.45 billion, respectively. It surpassed the Street EPS estimates in three of the trailing four quarters. The stock has gained 38.3% year-to-date to close the last trading session at $8.67.
ASX’s strong prospects are reflected in its POWR Ratings. It has an overall rating of B, equating to a Buy in our proprietary rating system.
It has an A grade for Value and Momentum and a B for Sentiment. It is ranked #14 in the Semiconductor & Wireless Chip industry. To see ASX’s Growth, Stability, and Quality ratings, click here.
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TXN shares were trading at $157.12 per share on Friday afternoon, down $0.56 (-0.36%). Year-to-date, TXN has declined -1.92%, versus a 21.38% 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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