Semiconductors are the core infrastructure powering the Information Age. 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 51.8% and beaten the S&P 500 by 38.5 percentage points.
Although these businesses have produced results lately, investors should tread carefully as not all companies are equipped for the next technological innovation. Taking that into account, here is one resilient semiconductor stock at the top of our wish list and two we would avoid.
Two Semiconductor Stocks to Sell:
Sensata Technologies (ST)
Market Cap: $6.35 billion
Originally a temperature sensor control maker and a subsidiary of Texas Instruments for 60 years, Sensata Technology Holdings (NYSE: ST) is a leading supplier of analog sensors used in industrial and transportation applications, best known for its dominant position in the tire pressure monitoring systems in cars.
Why Are We Bearish on ST?
- Customers postponed purchases of its products and services this cycle as its revenue declined by 3.3% annually over the last two years
- Estimated sales growth of 4.5% for the next 12 months is soft and implies weaker demand
- Gross margin of 29.1% is below its competitors, leaving less money to invest in areas like marketing and R&D
Sensata Technologies is trading at $43.64 per share, or 10.8x forward P/E. If you’re considering ST for your portfolio, see our FREE research report to learn more.
IPG Photonics (IPGP)
Market Cap: $3.40 billion
Both a designer and manufacturer of its products, IPG Photonics (NASDAQ: IPGP) is a provider of high-performance fiber lasers used for cutting, welding, and processing raw materials.
Why Do We Avoid IPGP?
- Customers postponed purchases of its products and services this cycle as its revenue declined by 4.9% annually over the last five years
- Operating profits fell over the last five years as its sales dropped and it struggled to adjust its fixed costs
- Sales were less profitable over the last five years as its earnings per share fell by 18.3% annually, worse than its revenue declines
At $80.06 per share, IPG Photonics trades at 38.3x forward P/E. Check out our free in-depth research report to learn more about why IPGP doesn’t pass our bar.
One Semiconductor Stock to Buy:
Nvidia (NVDA)
Market Cap: $5.27 trillion
Founded in 1993 by Jensen Huang and two former Sun Microsystems engineers, Nvidia (NASDAQ: NVDA) is a leading fabless designer of chips used in gaming, PCs, data centers, automotive, and a variety of end markets.
Why Will NVDA Beat the Market?
- Impressive 77.4% annual revenue growth over the last two years indicates it’s winning market share this cycle
- Share repurchases over the last five years enabled its annual earnings per share growth of 82.6% to outpace its revenue gains
- Robust free cash flow margin of 42.5% gives it many options for capital deployment, and its recently improved profitability means it has even more resources to invest or distribute
Nvidia’s stock price of $218.25 implies a valuation ratio of 18.1x forward P/E. Is now the right time to buy? See for yourself in our full research report, it’s free.
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