The demand for semiconductor chips skyrocketed over the past couple of years, causing a massive supply shortage worldwide. As companies and governments were working on addressing the supply shortage, the decline in demand for consumer electronics amid increasing recession fears led to a fall in demand and excess inventory for chip manufacturers this year.
However, the growing application of chips in this increasingly digitalized world and easing supply shortages should drive the industry’s long-term growth.
The global semiconductor market is expected to grow at a CAGR of 12.2% to reach $1.38 trillion by 2029. The demand for chips is expected to be driven by the data center market, 5G adoption, and electric and autonomous vehicles.
Moreover, the CHIPS and Science Act, signed into law on August 9, 2022, aims to provide roughly $280 billion in funding to boost domestic research and manufacturing of semiconductors in the United States. The Act seeks to provide domestic semiconductor manufacturers with $52 billion in subsidies to cut reliance on foreign sourcing and increase competitiveness with China and other countries.
Given this backdrop, we think it could be wise to invest in fundamentally strong chip stocks FormFactor, Inc. (FORM), Photronics, Inc. (PLAB), and Everspin Technologies, Inc. (MRAM), which are trading at discounts to their peers. On the other hand, investors should avoid Marvell Technology, Inc. (MRVL) due to its weak financials and stretched valuation.
Stocks to Buy:
FormFactor, Inc. (FORM)
FORM provides test and measurement technologies. The company operates through two segments: Probe Cards and Systems. It designs, manufactures, and sells multiple product lines, including probe cards, analytical probes, probe stations, and metrology systems.
On June 9, 2022, FORM announced the immediate availability of cryogen-free dilution refrigerators (DRs), which are capable of cooling to the ultra-low sub-10 millikelvin temperatures required for the operation of superconducting quantum computers.
FORM’s Senior VP and GM of Emerging Growth Business Unit Amy Leong said, “With the addition of these DR systems, FormFactor not only extends its cryogenic capabilities for quantum technology but also expands its customer relationships with world-leading corporations and research centers.”
In terms of forward non-GAAP PEG, FORM's 0.95x is 29.9% lower than the 1.35x industry average. Its forward EV/Sales of 2.45x is 1.7% lower than the 2.49x industry average. Also, its forward P/B of 2.74x is 26.2% lower than the 3.72x industry average.
FORM’s revenues increased 8.4% year-over-year to $203.90 million for the second quarter that ended June 25, 2022. The company’s non-GAAP gross profit increased 15.7% year-over-year to $96.69 million. Its non-GAAP net income increased 29.3% year-over-year to $36.77 million. In addition, its non-GAAP EPS came in at $0.46, representing an increase of 27.7% year-over-year.
Analysts expect FORM’s EPS for fiscal 2023 to increase 22.6% year-over-year to $1.79. Its revenue for fiscal 2022 is expected to increase 0.4% year-over-year to $772.85 million. It surpassed Street EPS estimates in each of the trailing four quarters. Over the past month, the stock has lost 1.9% to close the last trading session at $27.26.
FORM’s POWR Ratings reflect solid prospects. According to our proprietary rating system, it has an overall rating of B, translating to a Buy. The POWR Ratings assess stocks by 118 different factors, each with its own weighting.
It has a B grade for Momentum and Quality. It is ranked #22 out of 92 stocks in the B-rated Semiconductor & Wireless Chip industry. Click here to see the other ratings of FORM for Growth, Value, Stability, and Sentiment.
Photronics, Inc. (PLAB)
PLAB manufactures and sells photomask products and services in the United States and internationally.
In terms of forward non-GAAP P/E, PLAB's 8.43x is 50% lower than the 16.85x industry average. Its forward EV/Sales of 1.05x is 57.8% lower than the 2.49x industry average. Also, its forward P/S of 1.16x is 53.3% lower than the 2.48x industry average.
PLAB’s revenue increased 28.9% year-over-year to $219.94 million for the third quarter that ended July 31, 2022. The company’s net income increased 82.8% year-over-year to $31.23 million. In addition, its EPS came in at $0.51, representing an increase of 82.1% year-over-year.
Analysts expect PLAB’s EPS and revenue for the quarter ending October 31, 2022, to increase 45.4% and 15.8% year-over-year to $0.48 and $210 million, respectively. It surpassed consensus EPS estimates in each of the trailing four quarters. Over the past year, the stock has gained 15.4% to close the last trading session at $15.52.
PLAB’s POWR Ratings reflect this promising outlook. The stock has an overall A rating, which equates to a Strong Buy in our proprietary rating system.
It has an A grade for Value and a B for Growth, Momentum, Sentiment, and Quality. It is ranked #4 out of 92 stocks in the same industry. Click here to see the rating of PLAB for Stability.
Everspin Technologies, Inc. (MRAM)
MRAM manufactures and sells magnetoresistive random access memory (MRAM) products in the United States, Hong Kong, Japan, China, Canada, and internationally. It offers Toggle MRAM, spin-transfer torque MRAM, tunnel magnetoresistance sensor products, and foundry services for embedded MRAM.
The company provides its products for applications, including data centers, industrial, medical, automotive/transportation, and aerospace markets.
In terms of forward non-GAAP P/E, MRAM's 16.25x is 3.6% lower than the 16.85x industry average. Its forward EV/Sales of 1.74x is 30.2% lower than the 2.49x industry average. Also, its forward P/S of 2x is 19.5% lower than the 2.48x industry average.
For the fiscal second quarter that ended June 30, 2022, MRAM’s revenue increased 24.1% year-over-year to $14.70 million. The company’s adjusted EBITDA increased 114% year-over-year to $3.25 million. Also, its net income and comprehensive income increased 552.7% year-over-year to $1.67 million. In addition, its EPS came in at $0.08, representing an increase of 700% year-over-year.
For fiscal 2023, MRAM’s EPS is expected to increase 1.4% year-over-year to $0.37. Its revenue for the quarter that ended September 30, 2022, is expected to increase 0.7% year-over-year to $14.90 million. Over the past three months, the stock has gained 19.3% to close the last trading session at $5.93.
MRAM's overall B rating equates to a Buy in our POWR Ratings system. It is ranked #21 in the Semiconductor & Wireless Chip industry.
It has an A grade for Sentiment and a B for Value and Quality. To see the other ratings of MRAM for Growth, Momentum, and Stability, click here.
Stock to Avoid:
Marvell Technology, Inc. (MRVL)
MRVL is engaged in designing, developing, and selling integrated circuits and other infrastructure semiconductor solutions. The company’s offering caters to five markets- data center, carrier infrastructure, enterprise networking, consumer, and automotive/industrial.
MRVL’s operating expenses increased 17% year-over-year to $746.90 million for the fiscal second quarter that ended July 30, 2022. The company’s total liabilities came in at $6.63 billion, compared to $6.41 billion for the fiscal year that ended January 29, 2022. Its current liabilities increased 55.2% to $2.15 billion, compared to $1.38 billion for the fiscal year that ended January 29, 2022.
MRVL’s forward non-GAAP P/E of 18.31x is 8.6% higher than the industry average of 16.85x. Its 6.53x forward EV/Sales is 162% higher than the industry average of 2.49x. In addition, its forward EV/EBIT of 17.79x is 20.5% higher than the industry average of 14.77x.
The stock has declined 51.6% year-to-date to close the last trading session at $42.35.
MRVL’s POWR Ratings reflect this bleak outlook. It has an overall rating of D, which translates to a Sell in our proprietary rating system.
It has a D grade for Value, Stability, and Quality. Within the Semiconductor & Wireless Chip industry, it is ranked #82. Click here to see the other ratings of MRVL for Growth, Momentum, and Sentiment.
MRVL shares were trading at $39.93 per share on Monday morning, down $2.42 (-5.71%). Year-to-date, MRVL has declined -54.17%, versus a -22.95% rise in the benchmark S&P 500 index during the same period.
About the Author: Dipanjan Banchur
Since he was in grade school, Dipanjan was interested in the stock market. This led to him obtaining a master’s degree in Finance and Accounting. Currently, as an investment analyst and financial journalist, Dipanjan has a strong interest in reading and analyzing emerging trends in financial markets.
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