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from the world of economics and financeThis year is likely to be much better than the last for the semiconductor market as a whole, as inventories in the computing and smartphone markets (two of the biggest chip consumers) were worked down in second-half 2023. The World Semiconductor Trade Statistics (WSTS), which supplies data to the Semiconductor Industry Association (SIA), is projecting double-digit growth in semiconductors this year on the back of a 40% jump in memory demand.
Discrete, sensors, analog, logic and micro are also expected to grow, albeit at single-digit percentage rates. While growth will be across geographies, the Americas and Asia will post strong double-digit growth.
For the Analog/mixed signal group, however, the going is likely to be less smooth. That’s because many of these players have increased their exposure to auto and industrial markets, where design wins have more shelf life. The industrial end market is pulling the industry down -- notwithstanding the fact that growth prospects over the next 5-10 years remain excellent -- because of the adoption of new technologies like AI-ML, EVs, smart cities, IoT, etc.
The fourth quarter was likely the bottom for this industry, according to market research firms. Macro-related uncertainties remain, however, limiting growth. Magnachip Semiconductor MX and Analog Devices ADI are worth keeping an eye on.
About the Industry
The electronic gadgets we use to accurately read our commands, and record, store, retrieve and process the information we throw at them run on semiconductor technology, whether analog (enabling the recording and measurement of real-world information), digital (processing information available in machine-readable language) or mixed signal (enabling conversion of analog signals to digital or digital to analog among other things). Most electronic gadgets use a combination of these components, whether in consumer, industrial, auto, medical, communications, or IoT and other markets.
The industry is cyclical and prices are elastic. Players usually serve multiple markets that offset their individual seasonality, or focus on certain core markets for which they have highly differentiated technology and relationships.
Major Themes Impacting the Industry
Zacks Industry Rank Indicates Dismal Prospects
The Zacks Semiconductor – Analog and Mixed industry is housed within the broader Zacks Computer and Technology sector. It carries a Zacks Industry Rank #242, which places it in the bottom 3% of the 250 odd Zacks-classified industries.
The group’s Zacks Industry Rank, which is basically the average of the Zacks Rank of all the member stocks, indicates weak near-term prospects. Our research shows that the top 50% of the Zacks-ranked industries outperforms the bottom 50% by a factor of more than 2 to 1.
The industry’s positioning in the bottom 50% of Zacks-ranked industries is based on the earnings outlook for the constituent companies in aggregate. Looking at the aggregate earnings estimate revisions over the past year, we see that analyst opinion about the outlook for both 2023 and 2024 has materially deteriorated, and particularly since July 2023. Overall, the 2024 estimates have dropped 31.9% over the past year, while the 2025 estimates have dropped 24.1%.
Before we present a few stocks that you may want to consider for your portfolio, let’s take a look at the industry’s recent stock-market performance and valuation picture.
Stock Market Performance Continues to Lag
The Semiconductor – Analog and Mixed industry currently trades at a discount to both the broader Zacks Computer and Technology sector and the S&P 500. However, looking at its performance over the past year, it appears that while it has reached the level of the S&P 500 at times, the sector has been trading at a much higher multiple throughout.
Overall, the industry gained 5% over the past year while the broader sector gained 35.9% and the S&P 500 20.8%.
One-Year Price Performance
Image Source: Zacks Investment Research
Industry's Current Valuation
On the basis of forward 12-month price-to-earnings (P/E) ratio, the industry is trading at a 23.5X multiple, which is a premium to the S&P 500’s 20.2X and a discount to the broader computer and technology sector’s 24.8X. At the current level, it is also trading at a premium to its median level of 19.9X over the past year.
The industry has traded between the 15.9X and 26.8X multiples over the past year.
Forward 12 Month Price-to-Earnings (P/E) Ratio
Image Source: Zacks Investment Research
2 Stocks to Keep an Eye On
Given the deterioration in the outlook, there are currently no buy-ranked stocks in the sector. However, a couple of stocks with good long-term potential may be worth looking at:
Magnachip Semiconductor Corp. (MX): Cheongju, South Korea-based Magnachip Semiconductor designs and manufactures analog and mixed-signal semiconductor platform solutions for consumer, computing and industrial (including IoT and automotive) electronics OEMs, ODMs and EMS companies, as well as subsystem designers in Korea, the Asia Pacific, the U.S. and Europe. The company sells its products through a direct sales force, as well as through a network of agents and distributors.
The bulk of revenue comes from its Power Solutions business, which remains under pressure from inventory rebalancing at industrial customers (particularly China’s e-bike market and weakness in solar). Magnachip is however seeing continued momentum in design wins, particularly at auto OEMs. The OLED business remains slow although the company secured a couple of design wins in China. The phase-out of Transitional Foundry Services will negatively impact revenue this year. Therefore, the longer-term prospects as seen from new product innovation and design win momentum are strong, although macro concerns and inventory rebalancing could mean that near-term numbers will move around a little bit.
The company’s 2024 estimate has dropped 61 cents (105%) in the last 60 days. Analysts expect that in 2024, the company’s top line will grow 3.1% while the bottom line falls 116.4%. For 2025, the top and bottom lines will increase a respective 12.6% and 26.1%.
#3 (Hold) ranked Magnachip’s shares are down 46.9% over the past year.
Price and Consensus: MX
Image Source: Zacks Investment Research
Analog Devices, Inc. (ADI): Norwood, MA-based Analog Devices is an original equipment manufacturer of analog, mixed signal and digital signal processing (DSP) integrated circuits, including amplifies, converters, CODECs, embedded processing products, DSPs, MEMS and temperature sensors, thermal management products, RF/IF components, filters and processors. it has direct sales offices, sales representatives and distributors in more than 50 countries worldwide.
The company is well positioned for the long term with its product development, customer engagement, manufacturing capacity and balance sheet strength. However, inventories and industrial customers are still being worked down, something management expects will be mostly complete in the current quarter. Based on the fact that industrial bookings started picking up in the current quarter and continued strength in other areas, particularly EVs, it does appear that estimates have bottomed for now, which creates the impression that things go up from here. However macro conditions are hard to predict, which keeps us on the sidelines.
Analog Devices beat earnings estimates by a sliver in the first quarter and estimates for both 2024 and 2025 have dropped sharply since. In the last 60 days, the 2024 estimates dropped $1.08 (15.6%) while the 2025 estimate dropped 91 cents (10.7%). While revenue and earnings for 2024 are expected to decline a respective 25.6% and 41.9%, they’re expected to grow 11.9% and 29.8% the following year.
ADI shares, ranked #3, have declined 1.9% in the past year.
Price and Consensus: ADI
Image Source: Zacks Investment Research
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