Semiconductors are the picks and shovels of modern technology. Compute-intensive AI workloads are also priming them for the next wave of secular growth, a trend that has supported the industry over the past six months as its 3.4% return has closely followed the S&P 500.

Regardless of these results, investors must exercise caution as the rapid pace of innovation can easily turn today’s winners into tomorrow’s losers. On that note, here are two resilient semiconductor stocks at the top of our wish list and one we’re passing on.

One SemiconductorStock to Sell:

Analog Devices (ADI)

Market Cap: $117.8 billion

Founded by two MIT graduates, Ray Stata and Matthew Lorber in 1965, Analog Devices (NASDAQ: ADI) is one of the largest providers of high performance analog integrated circuits used mainly in industrial end markets, along with communications, autos, and consumer devices.

Why Are We Hesitant About ADI?

1. Customers postponed purchases of its products and services this cycle as its revenue declined by 12.7% annually over the last two years
2. Efficiency has decreased over the last five years as its operating margin fell by 7.3 percentage points
3. Underwhelming 6.4% return on capital reflects management’s difficulties in finding profitable growth opportunities, and its falling returns suggest its earlier profit pools are drying up

Analog Devices is trading at $237.01 per share, or 30.2x forward P/E. Dive into our free research report to see why there are better opportunities than ADI.

Two Semiconductor Stocks to Watch:

Lam Research (LRCX)

Market Cap: $123.9 billion

Founded in 1980 by David Lam, the man who pioneered semiconductor etching technology, Lam Research (NASDAQ: LRCX) is one of the leading providers of wafer fabrication equipment used to make semiconductors.

Why Do We Like LRCX?

1. Disciplined cost controls and effective management resulted in a strong two-year operating margin of 29.6%, and its operating leverage amplified its profits over the last five years
2. Robust free cash flow margin of 26.6% gives it many options for capital deployment, and its recently improved profitability means it has even more resources to invest or distribute
3. ROIC punches in at 63.1%, illustrating management’s expertise in identifying profitable investments

Lam Research’s stock price of $97.07 implies a valuation ratio of 25.6x forward P/E. Is now the right time to buy? Find out in our full research report, it’s free.

MACOM (MTSI)

Market Cap: $10.58 billion

Founded in the 1950s as Microwave Associates, a communications supplier to the US Army Signal Corp, today MACOM Technology Solutions (NASDAQ: MTSI) is a provider of analog chips used in optical, wireless, and satellite networks.

Why Could MTSI Be a Winner?

1. Annual revenue growth of 9.9% over the past two years was outstanding, reflecting market share gains this cycle
2. Projected revenue growth of 21.6% for the next 12 months is above its two-year trend, pointing to accelerating demand
3. Earnings per share grew by 81.7% annually over the last five years and trumped its peers

At $142.23 per share, MACOM trades at 37.9x forward P/E. Is now a good time to buy? See for yourself in our full research report, it’s free.

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