3 Electronics Semiconductor Stocks to Overcome Macro Headwinds
The challenging global macroeconomic environment and end-market volatility worldwide have affected the Zacks Electronics - Semiconductors industry. Moreover, geo-political tensions, unfavorable forex and recessionary fears weigh heavily on the industry’s prospects.
Nevertheless, industry players like Nova Ltd. NVMI, QuickLogic QUIK and Pixelworks PXLW have been benefiting from the increasing demand for high-volume consumer electronic devices, such as digital media players, smartphones and tablets, and the strong uptake of efficient packaging, machine vision solutions and robotics. Additionally, the growing proliferation of AI, Machine Learning (ML), Blockchain, Internet of Things (IoT), Augmented Reality/Virtual Reality (AR/VR) and industrial revolution 4.0 (which focuses on interconnectivity and automation) should continue to drive the industry’s growth. Also, easing supply-chain constraints are benefiting the industry participants.
Industry Description
The Zacks Electronics - Semiconductors industry comprises firms that provide a wide range of semiconductor technologies. Their offerings include packaging and test services, wafer cleaning, factory automation, face detection and image-recognition capabilities to develop intelligent and connected products. The participants primarily cater to end-markets constituting consumer electronics, communications, computing, industrial and automotive. These companies are raising their spending on research and development to stay afloat in an era of technological advancements and changing industry standards. The underlined industry is experiencing solid demand for advanced electronic equipment, helping these firms increase their investments in cost-effective process technologies.
What's Shaping the Future of the Electronics - Semiconductors Industry?
Macroeconomic Headwinds Pose Concerns: Fears of global recession and high inflation have negatively impacted the rate of deal wins. Due to the challenging macroeconomic scenario, enterprises are reluctant to sign multi-year deals worldwide. These trends do not bode well for industry participants.
Geo-political Tensions Are Worrisome: The ongoing Russia-Ukraine war, and most importantly, the souring relationship between the United States and China, remain headwinds. Increasing dependency on AI-backed electronic devices on semiconductors and current restrictions ordered by the United States on trading with China, which remains the main hub for chip production, is a significant negative for the underlined industry.
Complex Process Gaining Steam: The requirement for faster, more powerful and energy-efficient semiconductors is expected to increase rapidly with the robust adoption of cloud computing, IoT and AI. Semiconductor manufacturers are primarily looking to maximize manufacturing yields at lower costs. This is making semiconductor manufacturing processes more complex and driving the demand for solutions offered by industry participants. The rapid adoption of IoT-supported factory automation solutions is another contributing factor. The increasing deployment of 5G is another key catalyst.
Smart Devices Aiding Computing Demand: Smart devices need computing and learning capabilities to perform face detection, image recognition and video analytics capabilities. These require high processing power, speed and memory, low power consumption and better graphic processors and solutions, which bode well for the industry. Graphic solutions help increase the image rendering rate and improve image resolution and color definition.
Zacks Industry Rank Indicates Bleak Prospects
The Zacks Electronics - Semiconductors industry is housed within the broader Zacks Computer and Technology sector. It currently carries a Zacks Industry Rank #188, which places it in the bottom 25% of more than 250 Zacks industries.
The group’s Zacks Industry Rank, which is basically the average of the Zacks Rank of all the member stocks, indicates solid near-term prospects. Our research shows that the top 50% of the Zacks-ranked industries outperform the bottom 50% by a factor of more than two to one.
The industry’s positioning in the bottom 50% of the Zacks-ranked industries is a result of the negative earnings outlook for the constituent companies in aggregate. Looking at the aggregate earnings estimate revisions, it appears that analysts are pessimistic about this group’s earnings growth potential. Since Dec 31, 2023, the industry’s earnings estimates for the current year have moved 14.8% down.
Despite the gloomy industry outlook, a few stocks have the potential to outperform the market based on a strong earnings outlook. But before we present the top industry choices, it is worth taking a look at the industry’s shareholder returns and current valuation first.
Industry Outperforms S&P 500 & Sector
The Zacks Electronics - Semiconductors industry has outperformed the Zacks S&P 500 composite and the broader Zacks Computer and Technology sector in the past year.
The companies in the industry have collectively surged 86% compared with the S&P 500 and the broader sector’s rallies of 31.7% and 48.7%, respectively.
One-Year Price Performance
Industry's Current Valuation
On the basis of the forward 12-month price-to-earnings ratio, which is a commonly used multiple for valuing electronics semiconductors stocks, the industry is currently trading at 35.32X versus the S&P 500 and the sector’s 21.34X and 26.83X, respectively.
Over the past five years, the industry has traded as high as 44.41X and as low as 9.83X, with a median of 16.72X, as the chart below shows.
Price/Earnings Ratio (F12M)
3 Electronics Semiconductor Stocks to Buy
QuickLogic: This San Jose, CA-based company develops ultra-low-power multi-core voice-enabled SoCs, embedded FPGA IP and Endpoint AI solutions. QUIK is gaining from the growing demand for its IP-related products. Strength in its technology and Australis IP generator is noteworthy.
A solid momentum in QuickLogic’s Strategic Radiation Hardened FPGA Technology is another major positive. Growing contributions from large government contracts for this particular technology are driving the company’s top-line growth. Apart from this, this Zacks Rank #1 (Strong Buy) company is benefiting from increasing conversions from funnel opportunities, which are leading to new bookings.
You can see the complete list of today’s Zacks #1 Rank stocks here.
QuickLogic has gained 175.5% in the past year. The Zacks Consensus Estimate for QUIK’s 2024 earnings has remained stable at 36 cents per share over the last 60 days.
Price and Consensus: QUIK
Nova: This Israel-based company is a provider of metrology solutions for advanced process control used in semiconductor manufacturing. It is benefiting from the growing proliferation of materials metrology and chemical metrology solutions across front-end as well as back-end markets. Further, the solid adoption of optical metrology solutions among multiple DRAM customers remains a plus.
This Zacks Rank #2 (Buy) company is experiencing several wins with memory, logic and hybrid bonding customers on the back of its PRISM standalone optical metrology platform. Additionally, strength across Nova’s VERAFLEX, XPS and XRF, ELIPSON inline Raman, and ANCOLYZER and ANCOSCENE chemical metrology solutions remains positive.
The stock has gained 76.7% in the past year. The Zacks Consensus Estimate for NVMI’s 2024 earnings has moved 1.9% north to $5.43 per share over the last 60 days.
Price and Consensus: NVMI
Pixelworks: Portland, OR-headquartered leading provider of innovative video and display processing solutions, is gaining from solid momentum and strong growth in its mobile business. Strength in the IRX-branded gaming experience and certification program is driving the company’s momentum among smartphone customers and mobile gaming studios. Further, PXLW’s strengthening relationship with Walt Disney and Universal Pictures, thanks to its robust cinematic high frame rate technology, is expected to continue contributing well to the top-line growth.
This Zacks #2 Ranked company remains well-poised to gain solid traction among filmmakers and studios on the back of its TrueCut Motion platform, which is designed to deliver a high frame rate experience to audiences in theaters and at home. Also, the growing adoption of its visual processing solutions remains a positive.
Pixelworks has returned 85.4% in the past year. The Zacks Consensus Estimate for the stock’s 2024 bottom line is pegged at a loss of 18 cents per share, which has narrowed from 29 cents in the past 60 days.
Price and Consensus: PXLW
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Nova Ltd. (NVMI) : Free Stock Analysis Report
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