In the contemporary landscape, chips are often referred to as the 'new oil' due to their critical role in industries spanning automotive, consumer electronics, and defense. Additionally, government funding to enhance national security adds further optimism to the industry prospects.
Given the necessity, in this piece, I have highlighted the fundamentals of two chip stocks, Cirrus Logic, Inc. (CRUS) and Lam Research Corporation (LRCX), to determine which one could be a better investment candidate.
Despite facing ongoing challenges arising from prevailing macroeconomic conditions, which are exerting short-term pressure on the sector, the semiconductor industry demonstrates significant potential for long-term growth.
Gartner anticipates a 10.9% decrease in semiconductor revenue to $534.50 billion in 2023, followed by a robust 16.8% increase to $624.40 billion in 2024 as demand rebounds.
Moreover, as per The Semiconductor Industry Association (SIA), despite a minor decline compared to the previous year, global semiconductor sales in September 2023 experienced a 1.9% upturn compared to August 2023.
Additionally, the total worldwide semiconductor sales for the third quarter of 2023 amounted to $134.7 billion, indicating a 6.3% improvement from the second quarter.
“The long-term outlook for semiconductor demand remains strong, with chips enabling countless products the world depends on and giving rise to new, transformative technologies of the future,” said John Neuffer, SIA president and CEO.
On top of it, government support is further enhancing the industry outlook. For instance, last year, President Biden enacted the CHIPS and Science Act (CHIPS), which aims to enhance American competitiveness, fortify U.S. supply chains, and support national security along with access to crucial technologies.
Within the year following the enactment of CHIPS into law, companies have revealed investments exceeding $166 billion in semiconductor and electronics manufacturing. Additionally, since the commencement of the Biden-Harris Administration, companies have declared commitments totaling over $231 billion in semiconductor and electronics investments in the United States.
Therefore, considering the favorable long-term industry prospects, CRUS and LRCX both should benefit from them. In terms of price performance, CRUS has soared 15% over the past month to close the last trading session at $75.91. Meanwhile, LRCX gained 22.7% during the same period to close the last trading session at $715.92.
However, to find out which one is a better pick, let us dive deeper into the fundamentals of these Semiconductor & Wireless Chip stocks.
Recent Developments
On August 2, CRUS presented an innovative audio solution designed to facilitate the transition of PC manufacturers to the MIPI SoundWire® interface (1.2.1 specification), offering an enhanced and more immersive audio experience.
Alongside this newly introduced audio solution tailored for the PC platform, CRUS is collaborating with industry leaders Intel® and Microsoft to streamline the adoption of the SoundWire interface and scalable architecture, aiming to enhance audio capabilities in upcoming laptop designs.
Conversely, on November 9, LRCX declared a quarterly dividend of $2.00 per share, payable to its shareholders on January 3, 2024. The company’s annual dividend of $8.00 translates to a 1.12% yield on the prevailing prices, while its four-year average dividend yield is 1.21%. Its dividend payouts have grown at CAGRs of 15.9% and 22.9% over the past three and five years, respectively.
Recent Financial Results
CRUS’ net sales for the second quarter of fiscal 2024 (ended September 23, 2023) amounted to $481.06 million, while its net income and EPS came in at $75.41 million and $1.38, respectively. During the same period, its total current assets amounted to $1.09 billion, up 14.7% compared to $956.57 million as of September 24, 2022.
On the contrary, for the fiscal first quarter, which ended on September 24, 2023, LRCX’s revenue declined 31.4% year-over-year to $3.48 billion, while its net income amounted to $887.39 million and $6.66 per share, down 37.8% and 35.9% from the prior-year quarter, respectively.
However, during the same period, the company’s cash and cash equivalents stood at $5.13 billion, increasing 20.4% compared to $4.26 billion as of September 25, 2022.
Past and Expected Financial Performance
CRUS’ revenue grew at a CAGR of 12% over the past three years. Street expects CRUS’ revenue and EPS for the fiscal third quarter (ending December 2023) to be $540.07 million and $2.01, respectively.
Conversely, LRCX’s revenue increased at a CAGR of 12.7% over the past three years. Analysts expect LRCX’s revenue for the second quarter (ending December 2023) to decline 29.9% year-over-year to $3.70 billion. While its EPS for the current quarter is projected to come in at $7.11, declining 33.6% year-over-year.
Valuation
In terms of forward non-GAAP P/E, LRCX is currently trading at 24.66x, 69% higher than CRUS, which is trading at 14.59x. Moreover, LRCX’s forward EV/EBIT multiple of 22.39x is 115.3% higher than CRUS’ 10.40x. Additionally, LRCX’s forward EV/EBITDA multiple of 20.50x is 116% higher than CRUS’ 9.49x.
Thus, CRUS is more affordable.
POWR Ratings
CRUS has an overall rating of B, which equates to a Buy in our proprietary POWR Ratings system. Conversely, LRCX has an overall rating of C, translating to a Neutral. The POWR Ratings are calculated considering 118 different factors, with each factor weighted to an optimal degree.
Our proprietary rating system also evaluates each stock based on eight distinct categories. CRUS’ B grade for Value is justified by its discounted valuation ratios compared to the industry average. In terms of forward non-GAAP P/E, CRUS’ 14.59x is 33.8% lower than the industry average of 22.03x. Likewise, its forward EV/EBIT multiple of 10.40x is 45.7% lower than the industry average of 19.16x.
Conversely, LRCX has a C grade for Value, justified by its mixed valuation metrics. The stock’s forward P/E ratio of 26.41x is 3.5% lower than the industry average of 27.37x. However, its forward EV/Sales multiple of 6.42x is 141.6% higher than the industry average of 2.66x.
Among the 92 stocks in the Semiconductor & Wireless Chip industry, CRUS is ranked #17, while LRCX is ranked #34.
Beyond what we’ve stated above, we have also rated both stocks for Growth, Momentum, Stability, Sentiment, and Quality. Click here to view CRUS ratings. Get all LRCX ratings here.
The Winner
Despite short-term market fluctuations, the semiconductor industry’s long-term growth prospects remain bright, fueled by the persistent demand for more potent and energy-efficient chips and governmental backing. This sustained necessity underscores the enduring importance of the industry.
While the favorable industry trends should support both CRUS and LRCX to thrive, after examining the fundamentals of both stocks, CRUS emerges as a winner, supported by its stable financial standing and discounted valuation, especially when considering LRCX’s relatively poor financial results and a much higher valuation than industry norms.
Our research shows that the odds of success increase when one invests in stocks with an overall rating of Strong Buy. View all the top-rated stocks in Semiconductor & Wireless Chip industry here.
What To Do Next?
43 year investment veteran, Steve Reitmeister, has just released his 2024 market outlook along with trading plan and top 11 picks for the year ahead.
LRCX shares were trading at $720.41 per share on Friday afternoon, up $4.49 (+0.63%). Year-to-date, LRCX has gained 73.02%, versus a 21.26% rise in the benchmark S&P 500 index during the same period.
About the Author: Anushka Mukherjee
Anushka's ultimate aim is to equip investors with essential knowledge that empowers them to make well-informed investment choices and attain sustained financial prosperity in the long run.
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