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 7.3%, almost identical to the S&P 500.
Although these businesses have produced results lately, investors should tread carefully as not all companies are equipped for the next technological innovation. With that said, here are two semiconductor stocks boasting durable advantages and one that may face trouble.
One Semiconductor Stock to Sell:
Western Digital (WDC)
Market Cap: $25.9 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 Should You Sell WDC?
- Products and services are facing significant end-market challenges during this cycle as sales have declined by 10.7% annually over the last five years
- Negative 7.7% gross margin means it loses money on every sale and must pivot or scale quickly to survive
- Underwhelming 4.7% return on capital reflects management’s difficulties in finding profitable growth opportunities, and its decreasing returns suggest its historical profit centers are aging
Western Digital’s stock price of $74.66 implies a valuation ratio of 13.3x forward P/E. Dive into our free research report to see why there are better opportunities than WDC.
Two Semiconductor Stocks to Buy:
Lam Research (LRCX)
Market Cap: $124.5 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 Love LRCX?
- Annual revenue growth of 12.9% over the last five years was superb and indicates its market share increased during this cycle
- Excellent operating margin of 30.5% highlights the efficiency of its business model, and its operating leverage amplified its profits over the last five years
- Stellar returns on capital showcase management’s ability to surface highly profitable business ventures
At $98.55 per share, Lam Research trades at 24.3x forward P/E. Is now the time to initiate a position? See for yourself in our comprehensive research report, it’s free.
Nvidia (NVDA)
Market Cap: $4.27 trillion
Founded in 1993 by Jensen Huang and two former Sun Microsystems engineers, Nvidia (NASDAQ: NVDA) is a leading fabless designer of chips used in gaming, PCs, data centers, automotive, and a variety of end markets.
Why Is NVDA a Good Business?
- Annual revenue growth of 140% over the past two years was outstanding, reflecting market share gains this cycle
- Performance over the past five years was turbocharged by share buybacks, which enabled its earnings per share to grow faster than its revenue
- Impressive free cash flow profitability enables the company to fund new investments or reward investors with share buybacks/dividends, and its growing cash flow gives it even more resources to deploy
Nvidia is trading at $174.80 per share, or 37.1x forward P/E. Is now the right time to buy? Find out in our full research report, it’s free.
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