Semiconductors are the silicon backbone of the digital revolution. But they’re also susceptible to economic fluctuations as chip demand will ebb and flow with capital spending. Unfortunately, the market seems to be predicting a downturn as the industry has tumbled by 8.4% over the past six months. This performance is a far cry from the S&P 500’s 6% ascent.

Despite the lackluster result, a few diamonds in the rough can produce earnings growth no matter what, and we started StockStory to help you find them. Taking that into account, here is one semiconductor stock boasting a durable advantage and two we’re passing on.

Two Semiconductor Stocks to Sell:

Allegro MicroSystems (ALGM)

Market Cap: $4.6 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 Should You Sell ALGM?

1. Customers postponed purchases of its products and services this cycle as its revenue declined by 7.6% annually over the last two years
2. Performance over the past five years shows its incremental sales were much less profitable, as its earnings per share fell by 19.8% annually
3. 9.4 percentage point decline in its free cash flow margin over the last five years reflects the company’s increased investments to defend its market position

Allegro MicroSystems’s stock price of $24.27 implies a valuation ratio of 49.8x forward price-to-earnings. To fully understand why you should be careful with ALGM, check out our full research report (it’s free).

Teradyne (TER)

Market Cap: $18.37 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 Does TER Worry Us?

1. Annual sales declines of 5.5% for the past two years show its products and services struggled to connect with the market during this cycle
2. Costs have risen faster than its revenue over the last five years, causing its operating margin to decline by 8.7 percentage points
3. Free cash flow margin dropped by 5.2 percentage points over the last five years, implying the company became more capital intensive as competition picked up

Teradyne is trading at $112.33 per share, or 27.1x forward price-to-earnings. Dive into our free research report to see why there are better opportunities than TER.

One Semiconductor Stock to Watch:

Applied Materials (AMAT)

Market Cap: $137 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 Positive On AMAT?

1. Annual revenue growth of 13% over the past five years has been outstanding, reflecting market share gains this cycle
2. Highly efficient business model is illustrated by its impressive 29.1% operating margin, and its rise over the last five years was fueled by some leverage on its fixed costs
3. Stellar returns on capital showcase management’s ability to surface highly profitable business ventures

At $165.59 per share, Applied Materials trades at 17.7x forward price-to-earnings. Is now a good time to buy? See for yourself in our comprehensive research report, it’s free.

Stocks We Like Even More

The elections are now behind us. With rates dropping and inflation cooling, many analysts expect a breakout market - and we’re zeroing in on the stocks that could benefit immensely.

Take advantage of the rebound by checking out our Top 5 Growth Stocks for this month. This is a curated list of our High Quality stocks that have generated a market-beating return of 175% over the last five years.

Stocks that made our list in 2019 include now familiar names such as Nvidia (+2,183% between December 2019 and December 2024) as well as under-the-radar businesses like Axon (+711% five-year return). Find your next big winner with StockStory today for free.