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 has buoyed the industry, which has posted a six-month return of 3.4%, almost identical to the S&P 500.

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 is one resilient semiconductor stock at the top of our wish list and two we’re swiping left on.

Two SemiconductorStocks to Sell:

onsemi (ON)

Market Cap: $22.42 billion

Spun out of Motorola in 1999 and built through a series of acquisitions, onsemi (NASDAQ: ON) is a global provider of analog chips specializing in autos, industrial applications, and power management in cloud data centers.

Why Are We Wary of ON?

1. Annual sales declines of 10.6% for the past two years show its products and services struggled to connect with the market during this cycle
2. Forecasted revenue decline of 10.2% for the upcoming 12 months implies demand will fall even further
3. Poor free cash flow margin of 13.4% for the last two years limits its freedom to invest in growth initiatives, execute share buybacks, or pay dividends

onsemi is trading at $54 per share, or 19.6x forward P/E. To fully understand why you should be careful with ON, check out our full research report (it’s free).

Penguin Solutions (PENG)

Market Cap: $1.08 billion

Based in the US, Penguin Solutions (NASDAQ: PENG) is a diversified semiconductor company offering memory, digital, and LED products.

Why Do We Pass on PENG?

1. Products and services are facing significant end-market challenges during this cycle as sales have declined by 9.4% annually over the last two years
2. Poor expense management has led to an operating margin of 2% that is below the industry average
3. Underwhelming 5.4% return on capital reflects management’s difficulties in finding profitable growth opportunities, and its falling returns suggest its earlier profit pools are drying up

Penguin Solutions’s stock price of $21.14 implies a valuation ratio of 13.1x forward P/E. Dive into our free research report to see why there are better opportunities than PENG.

One Semiconductor Stock to Watch:

Micron (MU)

Market Cap: $141 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 Does MU Stand Out?

1. Impressive 36.4% annual revenue growth over the last two years indicates it’s winning market share this cycle
2. Expected revenue growth of 36.8% for the next year suggests its market share will rise
3. Incremental sales over the last five years have been more profitable as its earnings per share increased by 22.8% annually, topping its revenue gains

At $126.10 per share, Micron trades at 12.6x forward P/E. Is now the right time to buy? See for yourself in our full research report, it’s free.

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