Semiconductors are the picks and shovels of modern technology. The way we live and work is also changing with AI, which is creating secular demand for more powerful chips. As a result, the industry has seen solid stock price performance over the last six months as its gain of 46.5% has outpaced the S&P 500’s 13.5% return.
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 is one resilient semiconductor stock at the top of our wish list and two we’re steering clear of.
Two Semiconductor Stocks to Sell:
Intel (INTC)
Market Cap: $513.4 billion
Inventor of the x86 processor that powered decades of technological innovation in PCs, data centers, and numerous other markets, Intel (NASDAQ: INTC) is a leading manufacturer of computer processors and graphics chips.
Why Do We Pass on INTC?
- Sales tumbled by 4.9% annually over the last five years, showing market trends are working against it during this cycle
- Issuance of new shares over the last five years caused its earnings per share to fall by 27.1% annually, even worse than its revenue declines
- Cash-burning tendencies make us wonder if it can sustainably generate shareholder value
At $97.90 per share, Intel trades at 58.4x forward P/E. To fully understand why you should be careful with INTC, check out our full research report (it’s free).
onsemi (ON)
Market Cap: $31.58 billion
Spun out of Motorola in 1999 and built through a series of acquisitions, onsemi (NASDAQ: ON) is a global provider of analog chips specializing in autos, industrial applications, and power management in cloud data centers.
Why Are We Out on ON?
- Customers postponed purchases of its products and services this cycle as its revenue declined by 10.8% annually over the last two years
- Gross margin of 38.2% is below its competitors, leaving less money to invest in areas like marketing and R&D
- Expenses have increased as a percentage of revenue over the last five years as its operating margin fell by 16.9 percentage points
onsemi is trading at $81.20 per share, or 20.6x forward P/E. Check out our free in-depth research report to learn more about why ON doesn’t pass our bar.
One Semiconductor Stock to Buy:
Micron (MU)
Market Cap: $980.9 billion
Founded in the basement of a Boise, Idaho dental office in 1978, Micron (NASDAQ: MU) is a leading provider of memory chips used in thousands of devices across mobile, data centers, industrial, consumer, and automotive markets.
Why Should You Buy MU?
- Market share has increased this cycle as its 106% annual revenue growth over the last two years was exceptional
- Additional sales over the last five years increased its profitability as the 57.1% annual growth in its earnings per share outpaced its revenue
- Free cash flow margin increased by 14.1 percentage points over the last five years, giving the company more capital to invest or return to shareholders
Micron’s stock price of $866.97 implies a valuation ratio of 6x forward P/E. Is now the time to initiate a position? See for yourself in our in-depth research report, it’s free.
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