For the past year, semiconductor stocks have been under pressure, yet the pillars of success remain intact for a prosperous future once the macroeconomic uncertainty dissipates.
Entering 2022, the forecast was promising for top semiconductor stocks, but unforeseen events in the past year have led to significant market disruptions.
For example, the tech embargo against China led by the Biden administration has barred the country from purchasing advanced chips and equipment from the U.S. Moreover, COVID-induced lockdowns in Chinese cities hosting major chipmaking facilities have further strained an already beleaguered supply chain. As these logistical hurdles started to recede, the heightened chip demand during the pandemic began to taper off.
Adding to this, the market sentiment has been dampened by the Federal Reserve’s decision to raise interest rates.
Yet, semiconductor stocks still harbour positive triggers
Despite the challenging circumstances, the semiconductor sector is somewhat gloomy. Many potential growth drivers present this year will remain relevant in 2023: The shift in the automotive industry toward electric vehicles (EVs) and the broadening reach of 5G technology.
Furthermore, the steady digitization of industrial economies boosts the demand for cloud computing, increasing data center expenditure and stimulating further demand for semiconductors. An alleviation in supply chain woes could recenter attention on these triggers next year.
How we identified the top semiconductor stocks
Undoubtedly, 2022 has been one of the most challenging years for semiconductor stocks. Yet, for bold investors, it may present what future narratives could label as one of the best investment opportunities ever.
Leveraging my extensive experience in quantitative analysis, I identified the cream of the crop within the semiconductor sector. I targeted firms that exhibit fundamental superiority, occupying leading positions in expanding end markets.
I also incorporated chipmakers that provide some potential for stock pickers who enjoy uncovering hidden opportunities.
Keeping all of this in view, here are five of the most promising semiconductor stocks to invest in.
Kulicke and Soffa Industries
Market Cap: $2.7 billion
Dividend Yield: 1.6%
Kulicke and Soffa Industries (NASDAQ: KLIC), a semiconductor manufacturing equipment and services provider, showcased impressive results in 2021, making recent performances seem less stellar.
The company’s fiscal Q1 report ending Dec. 31 revealed a 62% and 60% YoY decrease in revenue and earnings, respectively, alongside an 88% dip in earnings per share. KLIC shares face challenges due to earnings estimate reductions and an unfavourable market landscape, reflected in their 38% dip year-to-date in October 2022, followed by a 25% rebound.
While KLIC faces concentration risk, with a few customers contributing significantly to earnings, their fiscal Q2 guidance implies a slowing deterioration rate. They’ve broadened their portfolio and enhanced capabilities by acquiring Advanced Jet Automation, which could stimulate long-term growth by providing access to the $2 billion dispensing equipment market.
KLIC’s 1.6% yield and roughly 30% annual dividend growth since 2018 make it a viable choice for income-focused investors in semiconductor stocks.
Marvell Technology
Market Cap: $33.8 billion
Dividend Yield: 0.6%
Marvell Technology (NASDAQ: MRVL) continues to move positively, despite a 35% dip in share price over the past 12 months. Marvell, a semiconductor manufacturer for data storage, communications, and consumer markets, reported Q4 fiscal 2023 results in line with expectations and a record annual revenue of $5.92 billion.
MRVL has managed to maintain growth despite the industry’s headwinds, particularly in enterprise networking and automotive/industrial sectors, where revenue rose 39% and 25% YoY, respectively. Stock-based compensation, depreciation, and amortization of intangible assets totalling nearly $500 million in the last quarter indicate the company’s success more than earnings per share.
KLA
Market Cap: $53.5 billion
Dividend Yield: 1.4%
KLA, a provider of semiconductor manufacturing solutions, remains an attractive investment due to solid fundamentals and industry outlook. Their fiscal Q3 earnings report reveals 6.6% and 4.1% YoY increases in revenue and GAAP earnings, respectively.
KLA boasted a healthy balance sheet and exceeded $1.01 billion in operating cash flow in the fiscal third quarter. Given its sales growth, steady EPS improvement, and decent balance sheet, KLAC has remained resilient despite the downturn in semiconductor stocks. However, KLA’s reliance on a limited number of customers does pose a risk.
Nvidia
Market Cap: $685.4 billion
Dividend Yield: 0.1%
Nvidia (NASDAQ: NVDA) shares have experienced considerable volatility over the past 12 months. Aided by their newly introduced graphics processing chip, A800, which complies with U.S. export restrictions on AI chipsets, NVDA shares have rebounded nearly 90% in 2023 after a 61% dip year-to-date in October 2022.
However, Nvidia’s rising inventory levels, now at $5.2 billion – double the figure from a year ago due to declining demand for its graphics processing units – may pose future challenges.
SiTime
Market Cap: $2.4 billion
Dividend Yield: N/A
SiTime (NASDAQ: SITM) produces silicon-based timing devices used in various electronic equipment. Despite some inventory issues, expectations are for demand to return in the second half of this year, suggesting that SITM, with its leadership position, design wins, and quote activity, could be a lucrative investment for believers in semiconductor stocks.
The semiconductor industry continues to be pivotal in driving global digital transformation. While challenges exist, companies like Kulicke and Soffa Industries, Marvell Technology, KLA, Nvidia, and SiTime are forging paths to remain competitive and profitable. Given semiconductors’ critical role in the rapidly expanding digital economy, investors should pay attention to these stocks. However, investors should always conduct thorough research and consider their risk tolerance before investing.
