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 bodes well for the industry, which has posted a six-month gain of 69.2% and beat the S&P 500 by 46 percentage points.
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 best left ignored.
Texas Instruments (TXN)
Market Cap: $156.1 billion
Headquartered in Dallas, Texas since the 1950s, Texas Instruments (NASDAQ: TXN) is the world’s largest producer of analog semiconductors.
Why Does TXN Fall Short?
- Products and services are facing significant end-market challenges during this cycle as sales have declined by 5.9% annually over the last two years
- Efficiency has decreased over the last five years as its operating margin fell by 11.4 percentage points
- Capital intensity has ramped up over the last five years as its free cash flow margin decreased by 29.7 percentage points
At $175.59 per share, Texas Instruments trades at 28.6x forward P/E. If you’re considering TXN for your portfolio, see our FREE research report to learn more.
Teradyne (TER)
Market Cap: $21.01 billion
Sporting most major chip manufacturers as its customers, Teradyne (NASDAQ: TER) is a US-based supplier of automated test equipment for semiconductors as well as other technologies and devices.
Why Are We Cautious About TER?
- Flat sales over the last five years suggest it must find different ways to grow during this cycle
- Costs have risen faster than its revenue over the last five years, causing its operating margin to decline by 14.4 percentage points
- Sales over the last five years were less profitable as its earnings per share fell by 4.4% annually while its revenue was flat
Teradyne’s stock price of $138.27 implies a valuation ratio of 34.2x forward P/E. To fully understand why you should be careful with TER, check out our full research report (it’s free for active Edge members).
Magnachip (MX)
Market Cap: $107.8 million
With its technology found in common consumer electronics such as TVs and smartphones, Magnachip Semiconductor (NYSE: MX) is a provider of analog and mixed-signal semiconductors.
Why Do We Steer Clear of MX?
- Annual sales declines of 16.3% for the past five years show its products and services struggled to connect with the market during this cycle
- Increased cash burn over the last five years raises questions about the return timeline for its investments
- Short cash runway increases the probability of a capital raise that dilutes existing shareholders
Magnachip is trading at $3.06 per share, or 0.6x forward price-to-sales. Read our free research report to see why you should think twice about including MX in your portfolio.
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