Semiconductors are the core infrastructure powering the Information Age. The amount of data we ingest is also increasing exponentially, leading to elevated demand for chips with more processing power. This secular trend bodes well for the industry, which has posted a six-month gain of 70.3% and beat the S&P 500 by 46.5 percentage points.
Nevertheless, a cautious approach is imperative because Moore’s Law (a principle stating that computer productivity doubles every two years) will eventually make even the most impactful technologies today obsolete. With that said, here are two resilient semiconductor stocks at the top of our wish list and one we’re steering clear of.
One Semiconductor Stock to Sell:
Microchip Technology (MCHP)
Market Cap: $33.75 billion
Spun out from General Instrument in 1987, Microchip Technology (NASDAQ: MCHP) is a leading provider of microcontrollers and integrated circuits used mainly in the automotive world, especially in electric vehicles and their charging devices.
Why Should You Sell MCHP?
- Sales tumbled by 4.2% annually over the last five years, showing market trends are working against its favor during this cycle
- Earnings per share decreased by more than its revenue over the last five years, showing each sale was less profitable
- 15.8 percentage point decline in its free cash flow margin over the last five years reflects the company’s increased investments to defend its market position
Microchip Technology’s stock price of $62.99 implies a valuation ratio of 35.8x forward P/E. Read our free research report to see why you should think twice about including MCHP in your portfolio.
Two Semiconductor Stocks to Watch:
Broadcom (AVGO)
Market Cap: $1.82 trillion
Originally the semiconductor division of Hewlett Packard, Broadcom (NASDAQ: AVGO) is a semiconductor conglomerate spanning wireless communications, networking, and data storage as well as infrastructure software focused on mainframes and cybersecurity.
Why Do We Love AVGO?
- Market share has increased this cycle as its 30% annual revenue growth over the last two years was exceptional
- Offerings are mission-critical for businesses and lead to a best-in-class gross margin of 76.1%
- Impressive free cash flow profitability enables the company to fund new investments or reward investors with share buybacks/dividends
At $387.09 per share, Broadcom trades at 46x forward P/E. Is now the right time to buy? Find out in our full research report, it’s free for active Edge members.
Seagate Technology (STX)
Market Cap: $56.84 billion
The developer of the original 5.25inch hard disk drive, Seagate (NASDAQ: STX) is a leading producer of data storage solutions, including hard drives and Solid State Drives (SSDs) used in PCs and data centers.
Why Do We Like STX?
- Market share has increased this cycle as its 18.5% annual revenue growth over the last two years was exceptional
- Sales outlook for the upcoming 12 months implies the business will stay on its desirable two-year growth trajectory
- Operating margin improved by 6.9 percentage points over the last five years as it eliminated redundant costs
Seagate Technology is trading at $267.39 per share, or 22.6x forward P/E. Is now the time to initiate a position? See for yourself in our comprehensive research report, it’s free for active Edge members .
Stocks We Like Even More
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