Semiconductors are the core infrastructure powering the Information Age. But they’re also susceptible to economic fluctuations as chip demand will ebb and flow with capital spending. Unfortunately, it’s unclear if we’re primed for another upswing as the industry’s 5.4% return has lagged the S&P 500 by 10.5 percentage points.
Some companies can grow regardless of the economic backdrop, but the odds aren’t great for the ones we’re analyzing today. On that note, here are three semiconductor stocks that may face trouble.
Western Digital (WDC)
Market Cap: $22.51 billion
Founded in 1970 by a Motorola employee, Western Digital (NASDAQ: WDC) is a leading producer of hard disk drives, SSDs and flash memory.
Why Do We Steer Clear of WDC?
- Sales were flat over the last five years, indicating it’s failed to expand this cycle
- Gross margin of 23.7% is below its competitors, leaving less money to invest in areas like marketing and R&D
- Responsiveness to unforeseen market trends is restricted due to its substandard operating profitability
Western Digital is trading at $63.60 per share, or 9.1x forward price-to-earnings. To fully understand why you should be careful with WDC, check out our full research report (it’s free).
Seagate Technology (STX)
Market Cap: $20.2 billion
The developer of the original 5.25inch hard disk drive, Seagate (NASDAQ: STX) is a leading producer of data storage solutions, including hard drives and Solid State Drives (SSDs) used in PCs and data centers.
Why Are We Out on STX?
- Products and services are facing significant end-market challenges during this cycle as sales have declined by 4.2% annually over the last five years
- High input costs result in an inferior gross margin of 26% that must be offset through higher volumes
- Subpar operating margin of 7.3% constrains its ability to invest in process improvements or effectively respond to new competitive threats
At $95.01 per share, Seagate Technology trades at 11.6x forward price-to-earnings. Check out our free in-depth research report to learn more about why STX doesn’t pass our bar.
Micron (MU)
Market Cap: $104.3 billion
Founded in the basement of a Boise, Idaho dental office in 1978, Micron (NYSE: MU) is a leading provider of memory chips used in thousands of devices across mobile, data centers, industrial, consumer, and automotive markets.
Why Are We Hesitant About MU?
- Massive revenue base of $29.09 billion makes it harder to increase sales quickly, and its annual revenue growth of 3.5% over the last two years was below our standards for the semiconductor sector
- Competitive supply chain dynamics and steep production costs are reflected in its low gross margin of 14.7%
- Cash-burning history makes us doubt the long-term viability of its business model
Micron’s stock price of $93.58 implies a valuation ratio of 9.1x forward price-to-earnings. Read our free research report to see why you should think twice about including MU in your portfolio.
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