Semiconductors are the core infrastructure powering the Information Age. 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 4.9%, almost identical to the S&P 500.
Regardless of these results, investors must exercise caution as the rapid pace of innovation can easily turn today’s winners into tomorrow’s losers. With that said, here is one resilient semiconductor stock at the top of our wish list and two we’re swiping left on.
Two SemiconductorStocks to Sell:
Skyworks Solutions (SWKS)
Market Cap: $11.19 billion
Result of a merger of Alpha Industries and the wireless communications division of Conexant, Skyworks Solutions (NASDAQ: SWKS) is a designer and manufacturer of chips used in smartphones, autos, and industrial applications to amplify, filter, and process wireless signals.
Why Is SWKS Risky?
- Products and services are facing significant end-market challenges during this cycle as sales have declined by 12.2% annually over the last two years
- Sales are expected to decline once again over the next 12 months as it continues working through a challenging demand environment
- Efficiency has decreased over the last five years as its operating margin fell by 19.2 percentage points
Skyworks Solutions is trading at $74.52 per share, or 18.9x forward P/E. Read our free research report to see why you should think twice about including SWKS in your portfolio.
Allegro MicroSystems (ALGM)
Market Cap: $6.32 billion
The result of a spinoff from Sanken in Japan, Allegro MicroSystems (NASDAQ: ALGM) is a designer of power management chips and distance sensors used in electric vehicles and data centers.
Why Do We Think ALGM Will Underperform?
- Customers postponed purchases of its products and services this cycle as its revenue declined by 13.7% annually over the last two years
- Earnings per share have dipped by 16.8% annually over the past four years, which is concerning because stock prices follow EPS over the long term
- Capital intensity has ramped up over the last five years as its free cash flow margin decreased by 10.5 percentage points
At $33.83 per share, Allegro MicroSystems trades at 67.8x forward P/E. Check out our free in-depth research report to learn more about why ALGM doesn’t pass our bar.
One Semiconductor Stock to Buy:
Broadcom (AVGO)
Market Cap: $1.30 trillion
Originally the semiconductor division of Hewlett Packard, Broadcom (NASDAQ: AVGO) is a semiconductor conglomerate spanning wireless communications, networking, and data storage as well as infrastructure software focused on mainframes and cybersecurity.
Why Is AVGO a Top Pick?
- Annual revenue growth of 27.6% over the past two years was outstanding, reflecting market share gains this cycle
- Superior product capabilities and pricing power lead to a best-in-class gross margin of 75.8%
- Strong free cash flow margin of 41.3% enables it to reinvest or return capital consistently
Broadcom’s stock price of $275.75 implies a valuation ratio of 38.1x forward P/E. Is now the right time to buy? See for yourself in our comprehensive research report, it’s free.
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