The companies grouped under the Semiconductor – General category produce a broad range of semiconductor devices, both integrated and discrete like microprocessors, graphics processors, embedded processors, chipsets, motherboards, wireless and wired connectivity products, DLPs, analog serving multiple end markets.
According to the Semiconductor Industry Association (SIA), the U.S. is the largest producer of semiconductors with 44% market share. The group estimates that overall semiconductors grew 13.7% in 2018 driven by double digit growth in the automotive, computing, communications, government and industrial end markets.
Three major themes shaping the industry are-
First, being on the building-block side of technology, it will continue to benefit from the proliferation of the Internet and the growing digitization of our lives in the foreseeable future.
Second, because of the growth potential in emerging markets, regulatory (and/or political) issues, particularly in places like China, can play an increasingly important role. In this context, the government’s strong stance against prime trading partner China has cast a shadow over the space, especially since a second-half resolution to the conflict doesn’t look likely any more.
Semiconductor companies in particular would have benefited because the Chinese government’s drive to build its own industry would have required plenty of collaborations with leading semiconductor players. The government is more concerned about IP protection and is trying to delay as far as possible, China’s own technological maturity. This is particularly negative for the industry because semiconductors typically go into manufacturing devices, the largest chunk of which is made in China.
Third, because end devices have to be priced lower to reach more people, the pressure on companies to bring down cost will remain. So companies will find it advantageous to move operations to places where labor may be cheaper or the proximity to manufacturing facilities can lower transportation and other cost.
Industry consolidation is also likely to continue as larger players add expertise through acquisitions. There’s also likely to be close collaboration with device makers facilitating quicker consumption and better inventory management.
Zacks Industry Rank Indicates Limited Returns
The Zacks Semiconductor-General Industry is a stock group within the broader Zacks Computer and Technology Sector. It carries a Zacks Industry Rank #169, which places it at the bottom 34% 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 uncertain 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 the negative earnings outlook for the constituent companies in aggregate. Looking at the aggregate earnings estimate revisions, it appears that analysts are losing confidence in this group’s earnings growth potential. In the past year, the industry’s earnings estimate for the current year has declined by 8.8%.
Before we present a few stocks that you may want to consider for your portfolio, let’s take a look at the industry’s recent stock-market performance and valuation picture.
Industry Lags on Stock Market Performance
The Zacks Semiconductor – General Industry has fallen behind both the broader Zacks Computer and Technology Sector and the S&P 500 index over the past year.
The industry lost 4.4% of its value during this period compared to the S&P 500 index’s increase of 5.1% and the broader sector’s increase of 3.9%.
One-Year Price Performance
Industry’s Current Valuation
On the basis of forward 12-month price-to-earnings (P/E) ratio, which is a commonly used multiple for valuing semiconductor companies, we see that the industry is currently trading at 16.29X, above the 15.24X median value but below the S&P 500’s 17.38X. It is also below the sector’s forward-12-month P/E of 20.44X.
Over the last five years, the industry has traded as high as 19.73X, as low as 12.86X and at the median of 16.14X, as the chart below shows.
Forward 12 Month Price-to-Earnings (P/E) Ratio
This isn’t the best place to invest in right now, at least not until the U.S. comes to an understanding with China and smartphone demand picks up later in the year. So while the more cautious of us might wait for a better entry point, here are a couple of stock picks for the rest-
Amtech Systems (ASYS): This Zacks Rank #2 (Buy) stock has gained 4.6% over the past year. The Zacks Consensus Estimate for the current-year EPS remains unchanged in the last 60 days.
Price and Consensus: ASYS
Texas Instruments Inc. (TXN): The Zacks Rank #2 (Hold) stock has gained 12.6% over the past year. The Zacks Consensus Estimate for the current-year EPS moved up 10 cents (1.9%) in the last 60 days.
Price and Consensus: TXN
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