Semiconductors are the core infrastructure powering the Information Age. The way we live and work is also changing with AI, which is creating secular demand for more powerful chips. As a result, the industry has seen solid stock price performance over the last six months as its gain of 52.3% has outpaced the S&P 500’s 5.1% return.
Regardless of these results, investors must exercise caution as the rapid pace of innovation can easily turn today’s winners into tomorrow’s losers. Taking that into account, here are three semiconductor stocks we’re steering clear of.
Intel (INTC)
Market Cap: $326.1 billion
Inventor of the x86 processor that powered decades of technological innovation in PCs, data centers, and numerous other markets, Intel (NASDAQ: INTC) is a leading manufacturer of computer processors and graphics chips.
Why Are We Out on INTC?
- Sales tumbled by 6.2% annually over the last five years, showing market trends are working against its favor during this cycle
- Performance over the past five years shows each sale was less profitable as its earnings per share dropped by 40.1% annually, worse than its revenue
- Capital intensity has ramped up over the last five years as its free cash flow margin decreased by 18.3 percentage points
Intel’s stock price of $64.72 implies a valuation ratio of 131.4x forward P/E. Check out our free in-depth research report to learn more about why INTC doesn’t pass our bar.
Photronics (PLAB)
Market Cap: $2.70 billion
Sporting a global footprint of facilities, Photronics (NASDAQ: PLAB) is a manufacturer of photomasks, templates used to transfer patterns onto semiconductor wafers.
Why Does PLAB Give Us Pause?
- Annual sales declines of 2% for the past two years show its products and services struggled to connect with the market during this cycle
- Estimated sales growth of 3.8% for the next 12 months is soft and implies weaker demand
- Gross margin of 35.7% reflects its high production costs
At $46.21 per share, Photronics trades at 20.7x forward P/E. If you’re considering PLAB for your portfolio, see our FREE research report to learn more.
Power Integrations (POWI)
Market Cap: $3.05 billion
A leading supplier of parts for electronics such as home appliances, Power Integrations (NASDAQ: POWI) is a semiconductor designer and developer specializing in products used for high-voltage power conversion.
Why Do We Steer Clear of POWI?
- Customers postponed purchases of its products and services this cycle as its revenue declined by 1.9% annually over the last five years
- Demand will likely be soft over the next 12 months as Wall Street’s estimates imply tepid growth of 6%
- Inability to adjust its cost structure while its revenue declined over the last five years led to a 22.6 percentage point drop in the company’s operating margin
Power Integrations is trading at $53.48 per share, or 41.3x forward P/E. Check out our free in-depth research report to learn more about why POWI doesn’t pass our bar.
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