Semiconductors are the silicon backbone of the digital revolution. The amount of data we ingest is also increasing exponentially, leading to elevated demand for chips with more processing power. This secular trend bodes well for the industry, which has posted a six-month gain of 119% and beat the S&P 500 by 107.3 percentage points.
Although these businesses have produced results lately, investors should tread carefully as not all companies are equipped for the next technological innovation. With that said, here are two semiconductor stocks boasting durable advantages and one we’re steering clear of.
One Semiconductor Stock to Sell:
Amkor (AMKR)
Market Cap: $16.98 billion
Operating through a largely Asian facility footprint, Amkor Technologies (NASDAQ: AMKR) provides outsourced packaging and testing for semiconductors.
Why Do We Avoid AMKR?
- Estimated sales growth of 10.7% for the next 12 months is soft and implies weaker demand
- Competitive supply chain dynamics and steep production costs are reflected in its low gross margin of 14.3%
- Lacking free cash flow margin got worse over the last five years as its investment needs accelerated
Amkor’s stock price of $68.70 implies a valuation ratio of 29.8x forward P/E. Check out our free in-depth research report to learn more about why AMKR doesn’t pass our bar.
Two Semiconductor Stocks to Watch:
Analog Devices (ADI)
Market Cap: $193.9 billion
Founded by two MIT graduates, Ray Stata and Matthew Lorber in 1965, Analog Devices (NASDAQ: ADI) is one of the largest providers of high performance analog integrated circuits used mainly in industrial end markets, along with communications, autos, and consumer devices.
Why Are We Positive On ADI?
- Market share has increased this cycle as its 15.5% annual revenue growth over the last five years was exceptional
- Offerings are mission-critical for businesses and result in a best-in-class gross margin of 62%
- ADI is a free cash flow machine with the flexibility to invest in growth initiatives or return capital to shareholders, and its recently improved profitability means it has even more resources to invest or distribute
Analog Devices is trading at $395.65 per share, or 31.3x forward P/E. Is now the right time to buy? Find out in our full research report, it’s free.
Seagate (STX)
Market Cap: $168.4 billion
One of two remaining major hard drive manufacturers after decades of industry consolidation, Seagate (NASDAQ: STX) manufactures hard disk drives and solid state drives that store data in data centers, cloud systems, and consumer devices.
Why Are We Backing STX?
- Market share has increased this cycle as its 32.6% annual revenue growth over the last two years was exceptional
- Operating profits increased over the last five years as the company gained some leverage on its fixed costs and became more efficient
- Free cash flow margin jumped by 9.3 percentage points over the last five years, giving the company more resources to pursue growth initiatives, repurchase shares, or pay dividends
At $747.40 per share, Seagate trades at 31x forward P/E. Is now a good time to buy? See for yourself in our in-depth research report, it’s free.
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