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 28.8% while the S&P 500 was down 2.3%.

Regardless of these results, investors must exercise caution as the rapid pace of innovation can easily turn today’s winners into tomorrow’s losers. Keeping that in mind, here is one semiconductor stock boasting a durable advantage and two we’re swiping left on.

Two Semiconductor Stocks to Sell:

Semtech (SMTC)

Market Cap: $7.68 billion

A public company since the late 1960s, Semtech (NASDAQ: SMTC) is a provider of analog and mixed-signal semiconductors used for Internet of Things systems and cloud connectivity.

Why Is SMTC Risky?

1. Costs have risen faster than its revenue over the last five years, causing its operating margin to decline by 16.5 percentage points
2. Free cash flow margin dropped by 7.6 percentage points over the last five years, implying the company became more capital intensive as competition picked up
3. Push for growth has led to negative returns on capital, signaling value destruction, and its falling returns suggest its earlier profit pools are drying up

Semtech’s stock price of $82.98 implies a valuation ratio of 37.5x forward P/E. Check out our free in-depth research report to learn more about why SMTC doesn’t pass our bar.

Kulicke and Soffa (KLIC)

Market Cap: $3.35 billion

Headquartered in Singapore, Kulicke & Soffa (NASDAQ: KLIC) is a provider of production equipment and tools used to assemble semiconductor devices

Why Do We Think Twice About KLIC?

1. Products and services are facing significant end-market challenges during this cycle as sales have declined by 1.6% annually over the last five years
2. Operating profits fell over the last five years as its sales dropped and it struggled to adjust its fixed costs
3. Performance over the past five years shows each sale was less profitable as its earnings per share dropped by 29.8% annually, worse than its revenue

Kulicke and Soffa is trading at $63.56 per share, or 21.9x forward P/E. Read our free research report to see why you should think twice about including KLIC in your portfolio.

One Semiconductor Stock to Buy:

KLA Corporation (KLAC)

Market Cap: $198.8 billion

Formed by the 1997 merger of the two leading semiconductor yield management companies, KLA Corporation (NASDAQ: KLAC) is the leading supplier of equipment used to measure and inspect semiconductor chips.

Why Is KLAC a Top Pick?

1. Impressive 16% annual revenue growth over the last five years indicates it’s winning market share this cycle
2. Superior product capabilities and pricing power result in a best-in-class gross margin of 60.7%
3. Robust free cash flow margin of 32.8% gives it many options for capital deployment, and its rising cash conversion increases its margin of safety

At $1,507 per share, KLA Corporation trades at 36.1x forward P/E. Is now the time to initiate a position? See for yourself in our in-depth research report, it’s free.

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