If we weren’t living in the digital age before the coronavirus, we definitely are now. Due to lockdowns and fear of being infected with COVID-19, people were forced to stay at home, which led to a surge in digital trends such as shopping at home, working from home, and learning from home.
As a result, there has been a surge in demand for laptops, smartphones, tablets, TVs, and cloud computing. Semiconductors are essential for making all of this “smart technology” operate.
As a result, semiconductor stocks soared in 2020. The iShares PHLX Semiconductor ETF (SOXX) gained more than 50% last year, compared to the S&P 500 which gained just 16%. Even after the majority of the population is vaccinated, the semiconductor industry will continue to see growth for years to come, as our reliance on technology continues to increase.
What are Semiconductors
A semiconductor is a material that partly conducts current. Most semiconductors are crystals that are made up of materials such as silicon. Their conductivity can be altered through impurities, or doping, to meet the needs of an electronic component in which it resides. A transistor is a semiconductor device that is used to amplify electronic signals and electrical power.
Semiconductors serve the purpose of amplifying signals. They are essentially the brains of almost every electronic device you use, such as your computer, smartphone, or watch. Semiconductors, or chips, can be used for memory, graphics, or storage. For instance, memory chips serve as temporary storage of data that passes information to and from parts of a device. Graphics chips help power the graphics from your computer to your monitor.
Semiconductor companies are continually trying to create smaller and faster products so that more power can be placed on each chip. The more transistors that are on a chip, the quicker it can do its work. This gave way to Moore’s law, which states that the number of transistors in a microchip will double roughly every two years. Not every company in the semiconductor industry designs and makes them. Some only design them, while others do the actual manufacturing. Other companies create the machinery to manufacture them.
Why are Semiconductors Important
The pandemic led us into a digital age that is here to stay. Semiconductors have been essential to facilitating that digitization. Even after the pandemic subsides, consumers will continue to expect and need the latest in technology. That doesn’t happen without chips. That’s especially true with 5G, artificial intelligence, and autonomous driving.
Semiconductors can do anything from power up a device to communicate with other devices. They will be used in homes, networks, and even factories and warehouses. Everything from computing, automotive, manufacturing, and telecommunications will be dependent on chips. For instance, as mentioned in our 5G industry report, all networks require chips. They are needed for base stations, 5G smartphones, and other types of devices.
In another example, autonomous vehicles will require chips. Cars must be able to react instantly with each other, and that can only be done with semiconductors.
While the demand for semiconductors skyrocketed last year, it also led to a worldwide chip shortage. Before the pandemic, the U.S./China trade war disrupted chip supply chains. Then the pandemic made things worse with the initial shutdown of chip manufacturing. The pandemic also resulted in the remote learning and working trend and a resultant surge in computer sales. This led to a massive spike in demand for chips.
The shortage is affecting many industries, including automobiles and electronics. Auto manufacturers need chips to create cars, so some of the biggest car companies in the world, including General Motors (GM), Ford (F), Volkswagen (VWAGY), and Toyota (TM), have been cutting production. This has also affected video game consoles. The demand for video game consoles has exploded over the past year, and Sony (SNE) and Microsoft (MSFT) are having a hard time keeping up with demand.
When you add in demand for chips in 5G, you have a broad base shortage likely to continue into next year. President Biden’s administration is now getting involved and is planning an executive order to shore up crucial supply chain items. On the other hand, investors see this as a positive for semiconductor stocks, driving up their prices.
Semiconductors stocks to Buy
Kulicke and Soffa Industries, Inc. (KLIC)
KILC provides equipment used in the manufacture of semiconductors. It focuses on packaging equipment that connects semiconductors to their protective casings. At the end of the semiconductor manufacturing process, the semiconductor material is put into a protective case. Connections are made so the product can interface with a circuit board. KLIC sells wire bonders and advanced packaging equipment that facilitate these connections.
These types of back-end services are soaring, which has helped KILC’s revenue skyrocket. New kinds of applications like 5G chipsets require more complicated and advanced packaging needs, which further demand KLICs products. The company is also expanding into other areas. For instance, it is acquiring Uniqarta, a company with next-gen technology in advanced LED displays.
The stock has an overall grade of B, which translates into a Buy in our POWR Ratings service. The company also has a Growth Grade of A. This isn’t surprising as KLICs earnings are up 358.8% over the past year. Sales are up 66.6% over the same time period. Earnings are expected to rise 547.6% year over year in the current quarter.
The stock also has a Quality Grade of B, which means it has a solid balance sheet. The company had cash of $564 million as of the most recent quarter end, with very little debt. It currently has a current ratio of 4.0. Due to the shortage, its stock has shown bullish momentum, leading to a Momentum Grade of B. We also rate SKLI based on Value, Stability, and Sentiment. To access those grades, click here.
KLIC is ranked #6 in the Semiconductor & Wireless Chip industry. This industry has a B rating. Investing in A or B-rated industries increased your chances of finding top stocks. For other top-rated stocks in that industry, click here.
Note that KLIC is one of the few stocks handpicked currently in the Reitmeister Total Return portfolio. Learn more here.
Amkor Technology, Inc. (AMKR)
Similar to KLIC, AMKR also provides semiconductor packaging. It packages and tests integrated circuits for semiconductor manufacturers, fabless chip companies, and contract foundries. The company is organized into two segments. The first is advanced products, including flip-chip, wafer-level processing, and testing services. The second is mainstream products such as wire-bond packaging and testing.
The company is seeing growth due to a number of factors. The first is the growing demand for mobile devices. AMKR has been increasing its share in the mobile communications market. Management is high on wafer-level packages, which are used in android phones. The company is also expanding its customer base, focusing on China. China’s market is considered a long-term growth driver for the company.
The auto market is also expected to help drive revenues. AMKR is rated a Buy in our POWR Ratings. It has a Value Grade of A. This makes sense as the stock has a trailing P/E of 13.02 and a forward P/E of only 10.53. Even with a low valuation, the stock has shown strong price momentum, leading to a Momentum Grade of B.
To access AMKR’s other grades, including Growth, Stability, and Quality, make sure to visit this link. The company is ranked #22 in the Semiconductor & Wireless Chip industry.
Vishay Intertechnology, Inc. (VSH)
A lesser-known chip company is VSH. VSH provides discrete semiconductors and passive components to original equipment manufacturers and distributors. These products are found in industrial, computing, automotive, consumer, telecommunications, power supplies, military, aerospace, and medical markets. They are used to switch, amplify, or transmit electrical signals.
The company is currently benefiting from strong demand in the automotive and industrial end-markets. As cars are equipped with more and more electronic content, VSH should see further gains. In addition, the rising adoption of driver-assistance systems will also aid growth. On the industrial side, the company is seeing demand for IoT censoring, infrastructure programs, and alternative energy.
Another way for companies to increase revenue is to raise prices, which is something VSH has been gradually doing. The company has also benefited from acquisitions. VSH has an overall grade of B or a Buy Rating in our POWR Ratings system. The company has a Growth Grade of B and a Value Grade of A. In its latest earnings report, earnings rose 119% year over year and 64.3% from the previous quarter.
The stock has a trailing P/E of 20.93 and a low forward P/E of 12.29. The company also has an EV/EBITDA of 7.9, indicating it is undervalued at its current price.
We also rate VSH based on Momentum, Stability, Sentiment, and Quality. You can find those grades here. VSH is ranked #11 in the Semiconductor & Wireless Chip industry.
Texas Instruments Inc. (TXN)
While many people remember TXN from its well-known calculators, 95% of its revenue is actually generated from semiconductors. The company is the world’s largest maker of analog chips used to process real-world signals such as sound and power. It also has a leading market share in digital signal processors used in wireless communications and microcontrollers used in various electronics applications.
TXN has a bright future ahead of it due to its focus on the Internet of Things (IoT) and 5G customer deployments. The recent emergence of 5G is aiding performance in TXN analog products. The opportunity in IoT is huge for semiconductor companies, as it connects every imaginable electronic device.
TXN also sees success in the automotive market. The company provides solutions for infotainment, safety, powertrain, and body electronics such as lighting. The company is rated a Buy in our POWR Ratings system. TXN has a Quality Grade of A, meaning its balance sheet is rock solid, highlighted by a current ratio of 6.1, indicating it has more than enough cash to handle short-term obligations.
For TXN’s other grades, including Growth, Value, Momentum, and Stability, click here. The company is ranked #33 in the Semiconductor & Wireless Chip industry.
Intel Corporation (INTC)
The final stock on this list might be a surprise to some. Over the summer last year, INTC was all but left for dead after it reported a delay in its new chips. But things are changing, and INTC is making a comeback. The company is one of the world’s largest chipmakers. It designs and manufactures microprocessors for the global personal computer and data center markets.
The company was previously known for its PC-centric business but is now shifting to data-centric businesses such as artificial intelligence and autonomous driving. In fact, its data-centric businesses accounted for almost half of its total revenue last year. To increase its market share in this business segment, the company has made investments in the Internet of Things (IoT) and memory and storage. As more information is stored in the cloud, there is a demand for more efficient chips in both cost and energy.
Still, the increase in computer sales has also helped the company in the meantime. INTC has an overall grade of B or a Buy Rating in our POWR Ratings system. It has a Value Grade of A, which would have been unheard of a few years ago, but that shows how much of an underdog it is now. Its trailing P/E is currently 12.55, a great valuation for investors looking to pick it up on the cheap.
INTC also has a Quality Grade of B with $22.4 billion in cash at the end of the last reported quarter. For access to INTC other grades (Growth, Momentum, Stability, and Sentiment), click here. The company is ranked #20 in the Semiconductor & Wireless Chip industry.
KLIC shares . Year-to-date, KLIC has gained 56.18%, versus a 4.50% rise in the benchmark S&P 500 index during the same period.
About the Author: David Cohne
David Cohne has 20 years of experience as an investment analyst and writer. He is the Chief Value Strategist for StockNews.com and the editor of POWR Value newsletter. Prior to StockNews, David spent eleven years as a consultant providing outsourced investment research and content to financial services companies, hedge funds, and online publications. David enjoys researching and writing about stocks and the markets. He takes a fundamental quantitative approach in evaluating stocks for readers. More...
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