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Bleak Near-Term Outlook for Semi Communications Industry

Zacks Equity Research

The Zacks Semiconductor – Communications industry primarily comprises companies that provide integrated circuits which are used in storage, network computing as well as connectivity devices. The industry participants primarily cater to end markets that constitute consumer, mobile, desktop, automotive, industrial, communications, IoT, wearable devices and others.

Here are the three major themes in the industry:

  • IoT is fast gaining market traction and bringing about fundamental changes in business models. It is advancing on the back of cloud storage and the growing interconnectedness of things. The increasing use of these IoT products in retail and transportation industries, and in the development of connected smart cities is driving growth of this industry.
     
  • As majority of the industry participants is dependent on China, the entire industry is tottering from the ongoing trade dispute between the United States and China, particularly in the areas of automotive and industrial automation, as well as semiconductor applications.
     
  • The entire industry is being impacted by the headwinds in the storage business. Weakness in the personal computing market, ongoing CPU shortages, U.S.-China trade tensions, moderating cloud capital expenditure and inventory increases among customers are all weakening storage demand. However, enterprise and data center storage demand should pick up pace in the near future, helping the industry to recover soon.

Zacks Industry Rank Blurs Prospects

The Zacks Semiconductor – Communications industry is housed within the broader Zacks Computer and Technology sector. It carries a Zacks Industry Rank #182, which places it at the bottom 29% 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 bleak near-term prospects.

Our research shows that the top 50% of the Zacks-ranked industries outperforms the bottom 50% by a factor of more than 2 to 1.

The industry’s positioning in the bottom 50% of the Zacks-ranked industries is a result of negative earnings outlook for the constituent companies in aggregate. Looking at the aggregate earnings estimate revisions, it appears that analysts are gradually losing confidence in this group’s earnings growth potential.In the past year, the industry’s earnings estimates for the current year have decreased 1.9%.

However, there are few stocks that have the potential to outperform the market. But let us first take a look at the industry’s shareholder returns and current valuation.

Industry Lags S&P 500 & Sector

The Zacks Semiconductor – Communications industry has lagged the Zacks S&P 500 composite, and the broader Zacks Computer and Technology Sector over the past year.

The industry has declined10.9% versus the S&P 500’s rise of 1.4% over the same period. Meanwhile, the broader sector has declined close to 0.5% in the said period.

One-Year Price Performance

Industry’s Current Valuation

On the basis of forward 12-month price-to-earnings ratio, which is a commonly used multiple for valuing Semiconductor – Communications stocks, the industry is currently trading at 15.65X versus the S&P 500’s 16.61X and the sector’s 19.34X.

Over the past five years, the industry has traded as high as 37.25X, as low as 13.64X and recorded a median of 21.08X, as shown in the charts below.

Price-to-Earnings (P/E) Ratio (F1)

 

 

Bottom Line

Growing adoption of IoT, smartphones, storage solutions, networking and connectivity solutions, including Wi-Fi as well as Wi-Fi/Bluetooth integrated SOCs, and the need for high-speed data in both communications networks and data centers bodes well for industry participants. Strong demand for ICs should continue to drive the industry’s growth.

None of the stocks in the Zacks Semiconductor – Communications industry flaunts a Zacks Rank #1 (Strong Buy). However, we present a stock that has a Zacks Rank #2 (Buy) and is well positioned to outperform the market. You can see the complete list of today’s Zacks #1 Rank stocks here.

DSP Group, Inc. (DSPG), a fabless semiconductor company offering advanced chip-set solutions for a variety of applications, has gained 1.8% over the past year. The company, which currently carries a Zacks Rank #2, came up with average four-quarter positive earnings surprise of 167.7%.

Price and Consensus: DSPG

 

Moreover, here are two stocks with a Zacks Rank #3 (Hold) that investors may currently hold on to.

Marvell Technology (MRVL), a fabless designer, developer and marketer of analog, mixed-signal and digital signal processing integrated circuits, has lost 13.7% over the past year. The company, which currently has a Zacks Rank #3, delivered average four-quarter negative earnings surprise of 2.02%.

Price and Consensus: MRVL

 

NeoPhotonics Corporation (NPTN), a manufacture of photonic integrated circuit or PIC based modules and subsystems for bandwidth-intensive, high-speed communications networks, has gained 39.2% over the past year. The company, which currently holds a Zacks Rank #3, recorded average four-quarter positive earnings surprise of 1.91%.

Price and Consensus: NPTN

 

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NeoPhotonics Corporation (NPTN) : Free Stock Analysis Report
 
Marvell Technology Group Ltd. (MRVL) : Free Stock Analysis Report
 
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