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 39.7% and beat the S&P 500 by 26.7 percentage points.
Although these businesses have produced results lately, investors should tread carefully as not all companies are equipped for the next technological innovation. Taking that into account, here are two semiconductor stocks we think can generate sustainable market-beating returns and one best left ignored.
One Semiconductor Stock to Sell:
Penguin Solutions (PENG)
Market Cap: $1.03 billion
Based in the US, Penguin Solutions (NASDAQ: PENG) is a diversified semiconductor company offering memory, digital, and LED products.
Why Do We Think PENG Will Underperform?
- Muted 4% annual revenue growth over the last five years shows its demand lagged behind its semiconductor peers
- Gross margin of 29.1% reflects its high production costs
- Ability to fund investments or reward shareholders with increased buybacks or dividends is restricted by its weak free cash flow margin of 6.2% for the last two years
Penguin Solutions’s stock price of $19.56 implies a valuation ratio of 9.5x forward P/E. To fully understand why you should be careful with PENG, check out our full research report (it’s free for active Edge members).
Two Semiconductor Stocks to Watch:
MACOM (MTSI)
Market Cap: $12.61 billion
Founded in the 1950s as Microwave Associates, a communications supplier to the US Army Signal Corp, today MACOM Technology Solutions (NASDAQ: MTSI) is a provider of analog chips used in optical, wireless, and satellite networks.
Why Do We Like MTSI?
- Market share has increased this cycle as its 22.1% annual revenue growth over the last two years was exceptional
- Offerings are mission-critical for businesses and lead to a top-tier gross margin of 54.4%
- Earnings per share grew by 29.1% annually over the last five years and trumped its peers
At $172.17 per share, MACOM trades at 39.9x forward P/E. Is now the time to initiate a position? Find out in our full research report, it’s free for active Edge members.
Nova (NVMI)
Market Cap: $9.27 billion
Headquartered in Israel, Nova (NASDAQ: NVMI) is a provider of quality control systems used in semiconductor manufacturing.
Why Is NVMI a Top Pick?
- Market share has increased this cycle as its 26.3% annual revenue growth over the last two years was exceptional
- Earnings growth has trumped its peers over the last five years as its EPS has compounded at 33.1% annually
- Impressive free cash flow profitability enables the company to fund new investments or reward investors with share buybacks/dividends
Nova is trading at $314.50 per share, or 33.4x forward P/E. Is now the right time to buy? See for yourself in our full research report, it’s free for active Edge members.
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