Semiconductors are the picks and shovels of modern technology. The way we live and work is also changing with AI, which is creating secular demand for more powerful chips. As a result, the industry has seen solid stock price performance over the last six months as its gain of 64% has outpaced the S&P 500’s 6.6% return.
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 are three semiconductor stocks that may face trouble.
Applied Materials (AMAT)
Market Cap: $256 billion
Founded in 1967 as the first company to develop tools for other businesses in the semiconductor industry, Applied Materials (NASDAQ: AMAT) is the largest provider of semiconductor wafer fabrication equipment.
Why Are We Wary of AMAT?
- Demand will likely be soft over the next 12 months as Wall Street’s estimates imply tepid growth of 3.7%
Applied Materials is trading at $322.27 per share, or 31.3x forward P/E. If you’re considering AMAT for your portfolio, see our FREE research report to learn more.
Sensata Technologies (ST)
Market Cap: $5.24 billion
Originally a temperature sensor control maker and a subsidiary of Texas Instruments for 60 years, Sensata Technology Holdings (NYSE: ST) is a leading supplier of analog sensors used in industrial and transportation applications, best known for its dominant position in the tire pressure monitoring systems in cars.
Why Do We Think ST Will Underperform?
- Customers postponed purchases of its products and services this cycle as its revenue declined by 4.8% annually over the last two years
- Competitive supply chain dynamics and steep production costs are reflected in its low gross margin of 30.2%
- ROIC of 5.3% reflects management’s challenges in identifying attractive investment opportunities, and its decreasing returns suggest its historical profit centers are aging
Sensata Technologies’s stock price of $35.95 implies a valuation ratio of 10x forward P/E. To fully understand why you should be careful with ST, check out our full research report (it’s free).
Semtech (SMTC)
Market Cap: $8.00 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 Should You Sell SMTC?
- Historical operating margin losses have deepened over the last five years as it prioritized growth over profits
- Lacking free cash flow margin got worse over the last five years as its investment needs accelerated
- Negative returns on capital show management lost money while trying to expand the business, and its falling returns suggest its earlier profit pools are drying up
At $86.64 per share, Semtech trades at 42x forward P/E. Read our free research report to see why you should think twice about including SMTC in your portfolio.
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