Despite the challenging macroeconomic conditions, the global chip industry is experiencing robust growth due to the extensive utilization of chips in electronics, industrial equipment, automotive, and other sectors. Furthermore, the rising adoption of AI-based applications is further spurring its growth.
Considering these factors, it could be wise to invest in quality chip stocks, Broadcom Inc. (AVGO), NXP Semiconductors N.V. (NXPI), and Skyworks Solutions, Inc. (SWKS).
Before diving deeper into their fundamentals, let’s discuss why the semiconductor industry is well-positioned for growth.
Despite experiencing a slowdown in the second half of 2022, the semiconductor industry reported its highest-ever annual sales, rising 3.3% year-over-year. Industry experts are optimistic about the semiconductor industry's future, given its constantly expanding application in various fields.
Worldwide sales of semiconductors rose 4.7% sequentially to $124.50 billion during the second quarter. Although semiconductor sales are projected to drop 10.3% year-over-year to $515.10 billion in 2023, the industry's long-term outlook appears promising.
Given the expanding use of chips across consumer electronics, defense, data centers, industrial machinery, and automobiles, semiconductor revenues are predicted to increase 18.5% year-over-year to $630.90 billion in 2024.
Semiconductor Industry Association’s President and CEO John Neuffer said, “Although global semiconductor sales in 2023 remain behind the totals from last year, revenue ticked up in June for the fourth consecutive month and notched solid quarter-over-quarter increases, providing optimism the market will continue to rebound over the second half of the year.”
The chip industry is expected to get an additional boost from the rising popularity of generative AI. The need for advanced chips to power generative AI applications will increase the demand for high-performance chips.
As a result, the global market for AI chips is anticipated to bring in $53.40 billion this year, an increase of 20.9% from the previous year. The market for AI chips is projected to double by 2027 compared to 2023 and reach $119.40 billion.
According to a report by Mordor Intelligence, the global semiconductor market is anticipated to grow at a CAGR of 10.9% to reach $1.09 trillion by 2028.
Considering these conducive trends, let’s analyze the fundamental aspects of the three Semiconductor & Wireless Chip picks, beginning with the third choice.
Stock #3: Broadcom Inc. (AVGO)
AVGO designs, develops, and supplies various semiconductor devices focusing on complex digital and mixed signal complementary metal oxide semiconductor-based devices and analog III-V based products worldwide. The company operates in two segments: Semiconductor Solutions and Infrastructure Software.
On August 21, 2023, AVGO announced that it expects its acquisition of VMware, Inc. (VMW) to close on October 30, 2023. AVGO provided an update on their progress with regulatory approvals, including receiving approval from the UK's Competition and Markets Authority and clearance in various other jurisdictions. AVGO is confident that this acquisition will enhance competition in the cloud and benefit enterprise customers.
In terms of the trailing-12-month EBIT margin, AVGO's 46.03% is 927.6% higher than the 4.48% industry average. Likewise, its 57.67% trailing-12-month EBITDA margin is 538.1% higher than the 9.04% industry average. Additionally, its 39.17% trailing-12-month levered FCF margin is 457.9% higher than the 7.02% industry average.
For the third quarter ended July 30, 2023, AVGO's net revenue increased 4.9% year-over-year to $8.88 billion. Its non-GAAP operating income rose 6.5% year-over-year to $5.54 billion. Its non-GAAP net income rose 8.4% year-over-year to $4.60 billion.
Also, its non-GAAP EPS came in at $10.54, representing an increase of 8.3% year-over-year. In addition, its adjusted EBITDA rose 7.9% year-over-year to $5.80 billion.
For the quarter ending October 31, 2023, AVGO's EPS and revenue are expected to increase 4.8% and 3.9% year-over-year to $10.95 and $9.28 billion, respectively. It surpassed the Street EPS estimates in each of the trailing four quarters. Over the past year, the stock has gained 77.3% to close the last trading session at $872.52.
AVGO's positive outlook is reflected in its POWR Ratings. It has an overall rating of B, equating to a Buy in our proprietary rating system.
It has an A grade for Quality and a B for Momentum and Sentiment. It is ranked #16 out of 92 stocks in the Semiconductor & Wireless Chip industry. To see AVGO's Growth, Value, and Stability ratings, click here.
Stock #2: NXP Semiconductors N.V. (NXPI)
Headquartered in Eindhoven, the Netherlands, NXPI offers various semiconductor products. The company's product portfolio includes microcontrollers, communication processors, analog and interface devices, radio frequency power amplifiers, and security controllers, as well as semiconductor-based environmental and inertial sensors.
On August 8, 2023, NXPI announced a joint investment plan with Taiwan Semiconductor Manufacturing Company Limited (TSM), Robert Bosch GmbH, and Infineon Technologies AG to invest in the European Semiconductor Manufacturing Company (ESMC) GmbH in Dresden, Germany. NXPI has a 10% equity stake in ESMC.
This investment aims to provide advanced semiconductor manufacturing services, primarily to support the automotive and industrial sectors' growing demand. The planned fab will have a monthly capacity of 40,000 300mm wafers, utilizing TSMC’s 28/22 nanometer planar CMOS and 16/12 nanometer FinFET process technology, strengthening Europe’s semiconductor manufacturing ecosystem with advanced FinFET transistor technology.
In terms of the trailing-12-month net income margin, NXPI's 21.04% is 934.7% higher than the 2.03% industry average. Likewise, its 37.36% trailing-12-month EBITDA margin is 313.4% higher than the 9.04% industry average. Additionally, its 28.47% trailing-12-month EBIT margin is 535.5% higher than the 4.48% industry average.
NXPI's total revenue for the second quarter that ended July 2, 2023, rose 5.7% sequentially to $3.30 billion. Its non-GAAP gross profit increased 6.1% sequentially to $1.93 billion. The company’s non-GAAP operating income rose 6.5% sequentially to $1.16 billion.
Its non-GAAP net income attributable to stockholders increased 7.4% sequentially to $896 million. Also, its non-GAAP EPS came in at $3.43, representing an increase of 7.5% sequentially.
Street expects NXPI’s EPS for the quarter ending March 31, 2024, to increase 8.4% year-over-year to $3.46. Its revenue for the quarter ending December 31, 2023, is expected to increase 3.7% year-over-year to $3.43 million. It surpassed the consensus EPS estimates in each of the trailing four quarters. The stock has gained 32.9% year-to-date to close the last trading session at $209.96.
It’s no surprise that NXPI has an overall rating of B, which translates to a Buy in our proprietary rating system.
It has a B grade for Momentum and Quality. Within the same industry, it is ranked #14. In total, we rate NXPI on eight different levels. Beyond what we stated above, we also have given NXPI grades for Growth, Value, Stability, and Sentiment. Get all the NXPI ratings here.
Stock #1: Skyworks Solutions, Inc. (SWKS)
SWKS designs, develops, manufactures, and markets proprietary semiconductor products in the United States, China, South Korea, Taiwan, Europe, the Middle East, Africa, and the rest of Asia-Pacific. Its product portfolio includes amplifiers, antenna tuners, attenuators, automotive tuners and digital radios, clocks, and timings, circulators/isolators, DC/DC convertors, etc.
In terms of the trailing-12-month EBITDA margin, SWKS's 35.70% is 295% higher than the 9.04% industry average. Likewise, its 18.28% trailing-12-month levered FCF margin is 160.4% higher than the 7.02% industry average. Additionally, its 20.97% trailing-12-month net income margin is 931.1% higher than the 2.03% industry average.
For the fiscal third quarter that ended June 30, 2023, SWKS's net revenue came in at $1.07 billion. Its non-GAAP gross profit came in at $509 million. The company’s non-GAAP net income came in at $276.30 million. Also, its non-GAAP earnings per share came in at $1.73. In addition, its net cash provided by operating activities increased 42.9% year-over-year to $305.70 million.
Analysts expect SWKS's revenue for the quarter ending March 31, 2024, is expected to increase 1.5% year-over-year to $1.17 billion. Its EPS for fiscal 2024 is expected to increase 7.6% year-over-year to $9.07. The stock has gained 20.4% year-to-date to close the last trading session at $109.68.
SWKS's POWR Ratings reflect solid prospects. It has an overall rating of B, which translates to a Buy in our proprietary rating system. The POWR ratings assess stocks by 118 different factors, each with its own weighting.
It is ranked #10 in the Semiconductor & Wireless Chip industry. It has a B grade for Value, Momentum, Sentiment, and Quality. Click here to see SWKS's Growth and Stability ratings.
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AVGO shares were trading at $872.52 per share on Monday afternoon, down $50.37 (-5.46%). Year-to-date, AVGO has gained 58.01%, versus a 18.87% rise in the benchmark S&P 500 index during the same period.
About the Author: Abhishek Bhuyan
Abhishek embarked on his professional journey as a financial journalist due to his keen interest in discerning the fundamental factors that influence the future performance of financial instruments.
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