Semiconductors are the picks and shovels of modern technology. 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 58.1% and beat the S&P 500 by 51.6 percentage points.
Nevertheless, a cautious approach is imperative because Moore’s Law (a principle stating that computer productivity doubles every two years) will eventually make even the most impactful technologies today obsolete. Taking that into account, here is one resilient semiconductor stock at the top of our wish list and two we’re steering clear of.
Two Semiconductor Stocks to Sell:
Microchip Technology (MCHP)
Market Cap: $42.06 billion
Spun out from General Instrument in 1987, Microchip Technology (NASDAQ: MCHP) is a leading provider of microcontrollers and integrated circuits used mainly in the automotive world, especially in electric vehicles and their charging devices.
Why Is MCHP Risky?
- Annual sales declines of 3.8% for the past five years show its products and services struggled to connect with the market during this cycle
- Sales were less profitable over the last five years as its earnings per share fell by 17.7% annually, worse than its revenue declines
- Capital intensity has ramped up over the last five years as its free cash flow margin decreased by 15.9 percentage points
At $76.58 per share, Microchip Technology trades at 31.7x forward P/E. Read our free research report to see why you should think twice about including MCHP in your portfolio.
Power Integrations (POWI)
Market Cap: $2.53 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?
- Sales tumbled by 1.9% annually over the last five years, showing market trends are working against its favor during this cycle
- 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
- Sales were less profitable over the last five years as its earnings per share fell by 6.1% annually, worse than its revenue declines
Power Integrations’s stock price of $45.14 implies a valuation ratio of 34.9x forward P/E. To fully understand why you should be careful with POWI, check out our full research report (it’s free).
One Semiconductor Stock to Buy:
Lam Research (LRCX)
Market Cap: $305.8 billion
Founded in 1980 by David Lam, the man who pioneered semiconductor etching technology, Lam Research (NASDAQ: LRCX) is one of the leading providers of wafer fabrication equipment used to make semiconductors.
Why Do We Love LRCX?
- Annual revenue growth of 19.8% over the last two years was superb and indicates its market share increased during this cycle
- Healthy operating margin of 31.9% shows it’s a well-run company with efficient processes, and its rise over the last five years was fueled by some leverage on its fixed costs
- Stellar returns on capital showcase management’s ability to surface highly profitable business ventures
Lam Research is trading at $244.83 per share, or 38.8x forward P/E. Is now the time to initiate a position? Find out in our full research report, it’s free.
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