3 Semiconductor Stocks We Steer Clear Of
Semiconductors are the core infrastructure powering the Information Age. Compute-intensive AI workloads are also priming them for the next wave of secular growth, so it’s no wonder the industry has outperformed the market over the past six months, delivering returns of 38.4% compared to 10.8% for the S&P 500.
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. On that note, here are three semiconductor stocks we’re passing on.
Microchip Technology (MCHP)
Market Cap: $39.91 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 Are We Bearish on MCHP?
- Customers postponed purchases of its products and services this cycle as its revenue declined by 11.8% annually over the last two years
- Earnings per share decreased by more than its revenue over the last five years, showing each sale was less profitable
- Free cash flow margin dropped by 15 percentage points over the last five years, implying the company became more capital intensive as competition picked up
Microchip Technology’s stock price of $73.60 implies a valuation ratio of 18.8x forward P/E. If you’re considering MCHP for your portfolio, see our FREE research report to learn more.
Qualcomm (QCOM)
Market Cap: $171.5 billion
Having been at the forefront of developing the standards for cellular connectivity for over four decades, Qualcomm (NASDAQ:QCOM) is a leading innovator and a fabless manufacturer of wireless technology chips used in smartphones, autos and internet of things appliances.
Why Does QCOM Give Us Pause?
- Decent 8.6% annual revenue growth over the last two years beat most of its peers, showing customers find value in its products and services
- Projected sales decline of 2.8% for the next 12 months points to a tough demand environment ahead
- Efficiency has decreased over the last five years as its operating margin fell by 12.7 percentage points
At $160.40 per share, Qualcomm trades at 17.1x forward P/E. Check out our free in-depth research report to learn more about why QCOM doesn’t pass our bar.
Semtech (SMTC)
Market Cap: $11.88 billion
A public company since the late 1960s, Semtech (NASDAQ:SMTC) is a provider of analog and mixed-signal semiconductors used for Internet of Things systems and cloud connectivity.
Why Are We Hesitant About SMTC?
- Day-to-day expenses have swelled relative to revenue over the last five years as its operating margin fell by 16 percentage points
- Free cash flow margin shrank by 10.6 percentage points over the last five years, suggesting the company is consuming more capital to stay competitive
- Negative returns on capital show that some of its growth strategies have backfired
Semtech is trading at $132.75 per share, or 36.5x forward P/E. Read our free research report to see why you should think twice about including SMTC in your portfolio.
Stocks We Like More
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