Semiconductors are the silicon backbone of the digital revolution. Still, they’re subject to swings in the broader economy because customers often stockpile chips ahead of demand, and investors seem to believe that inventory levels are correcting - over the past six months, the industry has shed 16.9%. This drawdown was particularly disheartening since the S&P 500 stood firm.

Only some companies are subject to these dynamics, however, and a handful of high-quality businesses can deliver earnings growth in any environment. With that said, here are two semiconductor stocks we think can generate sustainable market-beating returns and one we’re passing on.

One Semiconductor Stock to Sell:

Semtech (SMTC)

Market Cap: $3.33 billion

A public company since the late 1960s, Semtech (NASDAQ: SMTC) is a provider of analog and mixed-signal semiconductors used for Internet of Things systems and cloud connectivity.

Why Should You Sell SMTC?

1. Mounting Operating losses demonstrate the tradeoff between growth and profitability
2. Long-term business health is up for debate as its cash burn has increased over the last five years
3. Push for growth has led to negative returns on capital, signaling value destruction, and its decreasing returns suggest its historical profit centers are aging

At $38.13 per share, Semtech trades at 22.9x forward price-to-earnings. To fully understand why you should be careful with SMTC, check out our full research report (it’s free).

Two Semiconductor Stocks to Watch:

Nvidia (NVDA)

Market Cap: $2.78 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 Do We Love NVDA?

1. Annual revenue growth of 120% over the last two years was superb and indicates its market share increased during this cycle
2. Additional sales over the last five years increased its profitability as the 83.3% annual growth in its earnings per share outpaced its revenue
3. Impressive free cash flow profitability enables the company to fund new investments or reward investors with share buybacks/dividends, and its improved cash conversion implies it’s becoming a less capital-intensive business

Nvidia’s stock price of $111.96 implies a valuation ratio of 26x forward price-to-earnings. Is now a good time to buy? Find out in our full research report, it’s free.

Impinj (PI)

Market Cap: $2.60 billion

Founded by Caltech professor Carver Mead and one of his students Chris Diorio, Impinj (NASDAQ: PI) is a maker of radio-frequency identification (RFID) hardware and software.

Why Are We Fans of PI?

1. Annual revenue growth of 19.2% over the last two years was superb and indicates its market share increased during this cycle
2. Performance over the past five years shows its incremental sales were extremely profitable, as its annual earnings per share growth of 125% outpaced its revenue gains
3. Free cash flow margin jumped by 44.7 percentage points over the last five years, giving the company more resources to pursue growth initiatives, repurchase shares, or pay dividends

Impinj is trading at $90.72 per share, or 32.7x forward price-to-earnings. Is now the right time to buy? See for yourself in our in-depth research report, it’s free.

Stocks We Like Even More

The elections are now behind us. With rates dropping and inflation cooling, many analysts expect a breakout market - and we’re zeroing in on the stocks that could benefit immensely.

Take advantage of the rebound by checking out our Top 5 Strong Momentum Stocks for this week. This is a curated list of our High Quality stocks that have generated a market-beating return of 175% over the last five years.

Stocks that made our list in 2019 include now familiar names such as Broadcom (+634% between December 2019 and December 2024) as well as under-the-radar businesses like Axon (+711% five-year return). Find your next big winner with StockStory today for free.