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 has buoyed the industry, which has posted a six-month return of 3.4%, almost identical to the S&P 500.
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 swiping left on.
Two SemiconductorStocks to Sell:
onsemi (ON)
Market Cap: $22.42 billion
Spun out of Motorola in 1999 and built through a series of acquisitions, onsemi (NASDAQ:ON) is a global provider of analog chips specializing in autos, industrial applications, and power management in cloud data centers.
Why Are We Wary of ON?
Annual sales declines of 10.6% for the past two years show its products and services struggled to connect with the market during this cycle
Forecasted revenue decline of 10.2% for the upcoming 12 months implies demand will fall even further
Poor free cash flow margin of 13.4% for the last two years limits its freedom to invest in growth initiatives, execute share buybacks, or pay dividends
onsemi is trading at $54 per share, or 19.6x forward P/E. If you’re considering ON for your portfolio, see our FREE research report to learn more.
Penguin Solutions (PENG)
Market Cap: $1.08 billion
Based in the US, Penguin Solutions (NASDAQ:PENG) is a diversified semiconductor company offering memory, digital, and LED products.
Why Do We Pass on PENG?
Products and services are facing significant end-market challenges during this cycle as sales have declined by 9.4% annually over the last two years
Poor expense management has led to an operating margin of 2% that is below the industry average
Underwhelming 5.4% return on capital reflects management’s difficulties in finding profitable growth opportunities, and its falling returns suggest its earlier profit pools are drying up
Penguin Solutions’s stock price of $21.14 implies a valuation ratio of 13.1x forward P/E. Read our free research report to see why you should think twice about including PENG in your portfolio, it’s free.
One Semiconductor Stock to Watch:
Micron (MU)
Market Cap: $141 billion
Founded in the basement of a Boise, Idaho dental office in 1978, Micron (NYSE:MU) is a leading provider of memory chips used in thousands of devices across mobile, data centers, industrial, consumer, and automotive markets.
