With the demand for electronic gadgets hitting record highs last year as whole national populations adopted remote lifestyles, the semiconductor foundry industry fared well. According to Counterpoint research, the global semiconductor foundry industry’s revenue has increased 23% year-over-year to $82 billion last year. The supply chain disruption amid surging demand drove up the prices of semiconductors worldwide , feeding the booming sector.
This momentum should continue in 2021 because the remote working culture is still here, perhaps to stay. Higher productivity and flexible work hours should coax employers and employees to work from home indefinitely, driving the demand for personalized electronic gadgets still further. Moreover, 5G technology has already made its landfall in the United States, incentivizing the biggest device manufacturers to launch new products that support the new network standard . While 5G is not yet widely available, most of the world’s tech companies are aggressively upgrading their servers and hardware to support the standard, thereby generating more semiconductor demand.
With the ongoing global tech upgrade, the semiconductor industry is looking at robust growth rates this year. Investor optimism has already driven the prices of large-cap stocks in the industry, making them substantially overvalued. Small- and mid-cap companies, in contrast, are trading at relatively low valuations, despite significant growth in revenue and earnings.
Because he industry is set to continue thriving this year, we think under-the-radar stocks such as Power Integrations, Inc. (POWI), Semtech Corporation (SMTC), and Diodes Incorporated (DIOD) should be a more profitable investment bet compared to the stocks of the industry giants.
Power Integrations, Inc. (POWI)
POWI facilitates high-power voltage conversion through its analog and mixed-signal integrated circuits and ancillary electric components. It also manufactures a wide range of high voltage gate driver products, sold under the SCALE and SCALE-II family names. The company supplies its products internationally through original equipment manufacturers (OEMs), merchant power supply manufacturers, and independent retail distributors. On December 7, POWI was recognized as the “Best financially managed semiconductor company” by Global Semiconductor Alliance.
In October, POWI launched its MinE Cap Integrated Circuit, which is designed to facilitate high power density in a compact form. By reducing the size of the capacitor by roughly 40%, POWI's latest design is expected to be a “game changer” in the chargers and adapters segment, making them more compact and travel friendly.
POWI’s net revenues have increased 6.1% year-over-year to $121.13 million in the third quarter ended September 30, 2020. Its gross profit has risen 2.5% from the year-ago value to $59.57 million. And its EPS has grown 13.6% sequentially to $0.25 over this period.
The consensus EPS estimate of $1.77 for the fiscal 2021 indicates a 14.2% improvement year-over-year. POWI has an impressive earnings surprise history as well; it beat the Street’s EPS estimates in each of the trailing four quarters. The consensus revenue estimate of $528.52 million for the current year represents a 13.1% improvement from the same period last year.
POWI has gained more than 140% since hitting its 52-week low of $38.57 in March last year. The stock hit its 52-week high of $93.92 yesterday.
How does POWI stack up for the POWR Ratings?
A for Trade Grade
A for Buy & Hold Grade
A for Peer Grade
A for Industry Rank
A for Overall POWR Rating.
You cannot ask for better. POWI is currently ranked #34 of 99 stocks in the Semiconductor & Wireless Chip industry.
Semtech Corporation (SMTC)
SMTC designs and manufactures semiconductor products that have applications in the cloud computing and communications industry for consumer and industrial markets. Its mixed signal and analog semiconductor products can be categorized into four segments – Signal Integrity, Protection, Wireless and Sensing, and Power and High- Reliability. Based in California, the company operates in the United States, Europe, and Asian markets.
On December 15, SMTC partnered with Amazon.com, Inc.’s (AMZN) web services platform (AWS). With the collaboration, SMTC’s semiconductors are to be integrated with AWS’ network server. This development showcases SMTC’s brand reputation and popularity in the U.S. Moreover, SMTC was chosen by the U.S. Department of Defense to develop an IP mesh and 3D tracking system for foreign guests and fleet assets in the ports.
SMTC’s revenues increased 7% sequentially to $154.10 million in the fiscal third quarter ended October 25, 2020. This can be attributed to a 32% sequential rise in wireless and sensing products, and an 8% sequential rise in distributor point of sales. Its net income has grown 32% year-over-year to $18.48 million over period, while has increased 33.3% from the year-ago value to $0.28.
The consensus EPS estimate of $1.72 for the current year represents a 13.2% rise year-over-year. Moreover, SMTC beat the Street’s EPS estimates in each of the trailing four quarters, which is impressive. The consensus revenue estimate of $588.63 million for fiscal 2021 represents a 7.5% rise from the year-ago value.
SMTC has gained more than 185% since hitting its 52-week low of 26.03 in March 2020. The stock hit its 52-week high of $76.35 on January 8.
SMTC’s POWR Ratings reflect this bullish outlook. It has a “Strong Buy” rating with an “A” for Trade Grade, Buy & Hold Grade, and Industry Rank. It is currently ranked #38 in the same industry.
Diodes Incorporated (DIOD)
DIOD manufactures application specific standard products with integrated analog, mixed-signal, discrete and logic semiconductors. Its most popular product is a low pin count semiconductor, with active and passive components. The company operates across the Americas, Europe, and Asia through direct and independent sales, as well as wholesale and retail distributors. DIOD is a part of S&P Small Cap 600 index and Russell 2000 index.
On November 30, DIOD acquired Taiwanese semiconductor manufacturer Lite-On Semiconductor for $446 million. The acquisition allows the company to diversify its product portfolio, while strategically expanding its business operations to the East Coast.
The company has launched two-wire hall effect switches and USB type C port protectors over the last month. They ensure stable and efficient performance of electric gadgets irrespective of power fluctuations.
DIOD’s revenues have increased 7.2% sequentially to $309.50 million for the third quarter ended September 30, 2020. Gross profit has risen 9.5% from the prior quarter to $111.10 million, while its non-GAAP adjusted net income has grown 14.7% sequentially to $32.80 million.
The consensus EPS estimate of $3.30 for fiscal 2021 represents a 42.2% rise year-over-year. The company has an impressive earnings surprise history as well; it beat the Street’s EPS estimates in three of the trailing four quarters. The consensus revenue estimate of $1.54 billion for the current year indicates a 26.6% rise from the same period last year.
DIOD has gained more than 145% since hitting its 52-week low of $31.51 in March last year. The stock hit its 52-week high of $79.84 on January 8.
It is no surprise that DIOD is rated “Strong Buy” in our POWR Ratings system, with an “A” for Trade Grade, Buy & Hold Grade and Industry Rank, and a “B” for Peer Grade. It is currently ranked #41 in the Semiconductor & Wireless Chip industry.
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POWI shares were trading at $96.17 per share on Tuesday afternoon, up $2.37 (+2.53%). Year-to-date, POWI has gained 17.48%, versus a 1.41% rise in the benchmark S&P 500 index during the same period.
About the Author: Aditi Ganguly
Aditi is an experienced content developer and financial writer who is passionate about helping investors understand the do’s and don'ts of investing. She has a keen interest in the stock market and has a fundamental approach when analyzing equities.
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