Semiconductors are the silicon backbone of the digital revolution. 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 50.1% and beat the S&P 500 by 39.5 percentage points.
Although these businesses have produced results lately, investors should tread carefully as not all companies are equipped for the next technological innovation. Keeping that in mind, here are two semiconductor stocks boasting durable advantages and one we’re steering clear of.
One Semiconductor Stock to Sell:
Skyworks Solutions (SWKS)
Market Cap: $8.69 billion
Result of a merger of Alpha Industries and the wireless communications division of Conexant, Skyworks Solutions (NASDAQ: SWKS) is a designer and manufacturer of chips used in smartphones, autos, and industrial applications to amplify, filter, and process wireless signals.
Why Do We Avoid SWKS?
- Annual sales declines of 7.5% for the past two years show its products and services struggled to connect with the market during this cycle
- Projected sales decline of 10.7% over the next 12 months indicates demand will continue deteriorating
- Day-to-day expenses have swelled relative to revenue over the last five years as its operating margin fell by 19.3 percentage points
At $58.53 per share, Skyworks Solutions trades at 13.6x forward P/E. Read our free research report to see why you should think twice about including SWKS in your portfolio.
Two Semiconductor Stocks to Watch:
Seagate Technology (STX)
Market Cap: $69.79 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 Are We Fans of 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 expansion of 6.9 percentage points over the last five years shows the company optimized its expenses
Seagate Technology is trading at $321.23 per share, or 24.8x forward P/E. Is now the time to initiate a position? See for yourself in our in-depth research report, it’s free.
Universal Display (OLED)
Market Cap: $5.69 billion
Serving major consumer electronics manufacturers, Universal Display (NASDAQ: OLED) is a provider of organic light emitting diode (OLED) technologies used in display and lighting applications.
Why Do We Like OLED?
- Offerings and unique value proposition resonate with customers, as seen in its above-market 10.5% annual sales growth over the last five years
- Offerings are difficult to replicate at scale and result in a best-in-class gross margin of 75.3%
- Highly efficient business model is illustrated by its impressive 37.8% operating margin
Universal Display’s stock price of $119.77 implies a valuation ratio of 22.5x forward P/E. Is now a good time to buy? Find out in our full research report, it’s free.
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