The semiconductor industry thrives in today's tech-driven world, supporting innovation across sectors. Its robust foundation guarantees long-term growth, thanks to its expanding applications across various industries and the increasing adoption of emerging technologies, driving demand for advanced chips.
Given this backdrop, it could be wise to buy fundamentally strong semiconductor stocks Broadcom Inc. (AVGO), United Microelectronics Corporation (UMC), and Infineon Technologies AG (IFNNY). These stocks are Buy-rated in our proprietary POWR Ratings system.
Before diving deeper into the fundamentals of these stocks, let’s discuss why the semiconductor industry is well-positioned for growth.
The semiconductor industry is thriving, with chips becoming a crucial part of consumer electronics, automotive, and machinery. This growth is driven by broad applications in these sectors, along with rising demand for customized chips due to AI and Internet of Things (IoT) adoption. In August, global semiconductor sales reached $44 billion, up 1.9% sequentially.
The semiconductor industry is using nanotechnology and new materials for better chips. High-performance chips are in demand due to the growing smartphone market, improving user experiences. Notably, Gartner predicts AI chip revenue to hit $53.4 billion this year, up 20.9% from last year, driven by the need for high-performance GPUs and optimized semiconductor devices for generative AI platforms.
On top of it, the semiconductor industry is experiencing huge demand and receiving support from government initiatives like the CHIPS and Science Act. This act allocates around $53 billion to enhance semiconductor manufacturing, research, and workforce development in the United States.
Furthermore, in the past year, companies have announced $166 billion in semiconductor and electronics manufacturing investments. Since the beginning of the Biden-Harris administration, these commitments in the United States have risen to over $231 billion.
Considering these conducive trends, let’s analyze the fundamental aspects of the three Semiconductor & Wireless Chip picks, beginning with the third choice.
Stock #3: Broadcom Inc. (AVGO)
AVGO designs, develops, and supplies various semiconductor devices focusing on complex digital and mixed signal complementary metal oxide semiconductor-based devices and analog III-V based products worldwide. The company operates in two segments: Semiconductor Solutions and Infrastructure Software.
On October 30, 2023, AVGO and VMware, Inc. (VMW) announced that their acquisition is expected to close soon, with legal clearances in various jurisdictions, including the U.S. AVGO believes this acquisition will enhance competition and innovation in cloud computing.
On July 12, 2023, AVGO received conditional approval from the European Commission to complete its acquisition of VMware, Inc. (VMW). This approval is part of Broadcom's efforts to expand its presence in the multi-cloud ecosystem, and it has also received legal merger clearance in several other countries.
In terms of the trailing-12-month EBIT margin, AVGO's 45.70% is 830.5% higher than the 4.91% industry average. Likewise, its 57.34% trailing-12-month EBITDA margin is 525.2% higher than the 9.17% industry average. Additionally, its 38.97% trailing-12-month levered FCF margin is 428% higher than the 7.38% industry average.
For the third quarter ended July 30, 2023, AVGO's net revenue increased 4.9% year-over-year to $8.88 billion. Its non-GAAP operating income rose 6.5% year-over-year to $5.54 billion. Its non-GAAP net income rose 8.4% over the prior-year quarter to $4.60 billion.
Also, its non-GAAP EPS came in at $10.54, representing an increase of 8.3% year-over-year. In addition, its adjusted EBITDA rose 7.9% year-over-year to $5.80 billion.
For the quarter ending October 31, 2023, AVGO's EPS and revenue are expected to increase 4.8% and 3.9% year-over-year to $10.95 and $9.28 billion, respectively. It surpassed the Street EPS estimates in each of the trailing four quarters. Over the past year, the stock has gained 77.9% to close the last trading session at $841.25.
AVGO's positive outlook is reflected in its POWR Ratings. It has an overall rating of B, equating to a Buy in our proprietary rating system. The POWR ratings assess stocks by 118 different factors, each with its own weighting.
It has an A grade for Quality and a B for Momentum. It is ranked #21 out of 91 stocks in the Semiconductor & Wireless Chip industry. To see AVGO's Growth, Value, Stability, and Sentiment ratings, click here.
Stock #2: United Microelectronics Corporation (UMC)
Headquartered in Hsinchu City, Taiwan, UMC operates as a semiconductor wafer foundry in Taiwan, Singapore, China, Hong Kong, Japan, the United States, Europe, and internationally. The company provides circuit design, mask tooling, wafer fabrication, and assembly and testing services. It serves fabless design companies and integrated device manufacturers.
On June 26, 2023, UMC announced a partnership with Metalenz to bring metasurface optics to mass production and the open market, enabling smaller, lighter, and more efficient optical systems. They will also be the direct supplier to Chinese OEM, Dilusense.
Raj Verma, Associate VP of Technology Development, at UMC highlighted their top-notch facilities and semiconductor expertise as ideal for advanced semiconductor companies. He added that partnering with Metalenz would help UMC enter the meta-optics field and play a role in bringing this groundbreaking imaging technology to market, especially for 5G, Internet of Things (IoT), and automotive applications.
In terms of the trailing-12-month Capex/Sales margin, UMC’s 45.49% is significantly higher than the 2.42% industry average. Its 29.37% trailing-12-month net income margin is significantly higher than the 2.03% industry average. Likewise, its 20.81% trailing-12-month Return on Common Equity is significantly higher than the industry average of 1.13%.
UMC’s operating revenues for the third quarter ended September 30, 2023, came in at NT$57.07 billion ($1.76 billion). Its gross profit came in at NT$20.46 billion ($631.67 million). In addition, the company’s attributable net income to shareholders of parent and earnings per ADS stood at NT$15.97 billion ($493.02 million) and NT$6.45, respectively.
Analysts expect UMC’s revenue for the quarter ending June 30, 2024, to increase 3.6% year-over-year to $1.86 billion. It surpassed the consensus EPS estimates in three of the trailing four quarters. Over the past year, the stock has gained 17.4% to close the last trading session at $7.07.
UMC’s strong fundamentals are reflected in its POWR Ratings. It has an overall rating of B, equating to a Buy in our proprietary rating system.
It has an A grade for Momentum and a B for Value and Quality. It is ranked #10 in the same industry. To access UMC’s grades for Growth, Stability, and Sentiment click here.
Stock #1: Infineon Technologies AG (IFNNY)
Headquartered in Neubiberg, Germany, IFNNY designs, develops, manufactures, and markets semiconductors and related system solutions worldwide. It operates in four segments: Automotive, Industrial Power Control, Power & Sensor Systems, and Connected Secure Systems segment.
On October 24, 2023, IFNNY announced the successful completion of its acquisition of GaN Systems Inc., expanding its expertise and patents in gallium nitride (GaN)-based power conversion solutions and leading-edge application know-how. This strengthens its position in power semiconductors and accelerates time-to-market.
On October 4, 2023, IFNNY announced the acquisition of Zurich-based startup, 3db Access AG, known for their secured low-power Ultra-Wideband (UWB) technology. This addition enriches IFNNY's portfolio, expanding its connectivity solutions to include UWB for secure access, precise localization, and advanced sensing.
The collaboration also seeks to harness their collective expertise in the thriving UWB market. IFNNY intends to strengthen its partnership with ETH Zurich and participate in relevant standardization efforts.
In terms of the trailing-12-month EBIT margin, IFNNY’s 25.68% is 422.8% higher than the 4.91% industry average. Its 35.32% trailing-12-month EBITDA margin is 285.1% higher than the 9.17% industry average. Likewise, its 20.89% trailing-12-month Return on Common Equity is significantly higher than the industry average of 1.13%.
For the fiscal third quarter that ended June 30, 2023, IFNNY’s revenue increased 13% year-over-year to €4.09 billion ($4.33 billion). Its gross profit increased 16.4% year-over-year to €1.82 billion ($1.92 billion).
The company’s adjusted profit for the period from continuing operations attributable to shareholders of IFNNY and adjusted EPS came in at €887 million ($939.08 million) and €0.68, representing an increase of 39% and 38.8% year-over-year, respectively.
For the quarter ended September 30, 2023, IFNNY’s EPS and revenue are expected to increase 50.5% and 1% year-over-year to $0.67 and $4.32 billion, respectively. It surpassed the consensus EPS estimates in three of the trailing four quarters. Over the past year, the stock has gained 14.5% to close the last trading session at $29.02.
It’s no surprise that IFNNY has an overall rating of B, which translates to a Buy in our proprietary rating system.
It has a B grade for Value, Momentum, and Stability. Within the Semiconductor & Wireless Chip industry, it is ranked #6. In total, we rate IFNNY on eight different levels. Beyond what we stated above, we also have given IFNNY grades for Growth, Sentiment, and Quality. Get all the IFNNY ratings here.
What To Do Next?
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AVGO shares were trading at $836.93 per share on Tuesday afternoon, down $4.32 (-0.51%). Year-to-date, AVGO has gained 52.39%, versus a 9.86% rise in the benchmark S&P 500 index during the same period.
About the Author: Abhishek Bhuyan
Abhishek embarked on his professional journey as a financial journalist due to his keen interest in discerning the fundamental factors that influence the future performance of financial instruments.
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