Semiconductors are the core infrastructure powering the Information Age. Still, they’re subject to swings in the broader economy because customers often stockpile chips ahead of demand, and investors seem to believe that inventory levels are correcting - over the past six months, the industry has shed 21.3%. This drawdown was significantly worse than the S&P 500’s 4% fall.
Cyclicality aside, 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. On that note, here are three semiconductor stocks we’re swiping left on.
Marvell Technology (MRVL)
Market Cap: $53.73 billion
Moving away from a low margin storage device management chips in one of the biggest semiconductor business model pivots of the past decade, Marvell Technology (NASDAQ: MRVL) is a fabless designer of special purpose data processing and networking chips used by data centers, communications carriers, enterprises, and autos.
Why Is MRVL Not Exciting?
- Products and services are facing significant end-market challenges during this cycle as sales have declined by 1.3% annually over the last two years
- Historical operating losses point to an inefficient cost structure
- Negative returns on capital show management lost money while trying to expand the business, and its falling returns suggest its earlier profit pools are drying up
Marvell Technology’s stock price of $60.19 implies a valuation ratio of 22.3x forward price-to-earnings. Check out our free in-depth research report to learn more about why MRVL doesn’t pass our bar.
Micron (MU)
Market Cap: $98.84 billion
Founded in the basement of a Boise, Idaho dental office in 1978, Micron (NYSE: MU) is a leading provider of memory chips used in thousands of devices across mobile, data centers, industrial, consumer, and automotive markets.
Why Does MU Fall Short?
- Gross margin of 21.8% is below its competitors, leaving less money to invest in areas like marketing and R&D
- Poor expense management has led to an operating margin of 4.1% that is below the industry average
- Cash-burning tendencies make us wonder if it can sustainably generate shareholder value
Micron is trading at $86.18 per share, or 10.1x forward price-to-earnings. Read our free research report to see why you should think twice about including MU in your portfolio.
NXP Semiconductors (NXPI)
Market Cap: $48.19 billion
Spun off from Dutch electronics giant Philips in 2006, NXP Semiconductors (NASDAQ: NXPI) is a designer and manufacturer of chips used in autos, industrial manufacturing, mobile devices, and communications infrastructure.
Why Do We Think Twice About NXPI?
- Sales tumbled by 2.3% annually over the last two years, showing market trends are working against its favor during this cycle
- Projected sales decline of 4.8% over the next 12 months indicates demand will continue deteriorating
- Free cash flow margin dropped by 8 percentage points over the last five years, implying the company became more capital intensive as competition picked up
At $187.09 per share, NXP Semiconductors trades at 14.7x forward price-to-earnings. Dive into our free research report to see why there are better opportunities than NXPI.
Stocks We Like More
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