Coming off a good year in 2021, semiconductor stocks are poised perhaps for a great year in 2022.
The drivers, well known to most investors, are potent: The rollout of 5G and the transformation of the automotive market toward electric vehicles (EVs), for starters. There’s also the digitization of industrial economies – which drives the growth in cloud computing, which drives data center spending, which drives the demand for more and more semiconductors.
Put simply: Any investor looking for growth should be looking at semiconductor stocks.
BofA Global Research strategists seem to agree. They remain bullish on semiconductors, calling them the “new ‘oil’ of the rapidly digitizing global economy. “We see a worthwhile 2022 setup given above-trend 4%+ global gross domestic product (GDP) growth driving above-trend chip sales; underappreciated profitability; and multiple thematic levers,” they say.
Nothing is a sure bet, but regarding growth in semiconductor end markets: As hedge fund investors like to say, “We are not uncertain.”
Below are five of the best semiconductor stocks for investors looking to find growth in the industry. Some of them are simply fundamentally superior with leadership positions in growing end markets. Others offer some grist for stock pickers who like to look below the surface for opportunities.
Data is as of Jan. 10. Dividend yields are calculated by annualizing the most recent payout and dividing by the share price. Stocks are listed in alphabetical order.
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KLAGetty Images
Market value: $63.5 billionDividend yield: 1.0%The investment thesis for KLA (KLAC, $418.73), which offers semiconductor manufacturing solutions, is simple: fundamentals and industry outlook.
On the fundamental side, KLA is showing momentum in sales and earnings aptly demonstrated by its fiscal first-quarter report. For the period ending Sept. 30, revenues rose to $2.08 billion, up 8% sequentially and 35% on a year-over-year basis. Meanwhile, adjusted earnings of $4.64 per share were 5% higher quarter-over quarter and up 53% when compared to the prior year.
Part of the story on the increase in earnings is the company’s growing operating margin, which was 36% in 2021 versus just 30% in 2019. Historically, though, KLAC’s operating margin has shown some cyclicality.
The adjustment to the “adjusted” earnings per share came from removing a one-time tax benefit of $395 billion through maneuvers related to the company’s international ownership structure. So-called GAAP (generally accepted accounting principles) earnings per share for the quarter were $6.96, leading to a whopping, though somewhat misleading, year-over-year gain of 159%. The company should get a nod for pointing out the more modest non-GAAP performance.
KLA’s ability to fuel growth is bolstered by a solid balance sheet and cash flow generation. Based on September’s unaudited balance sheet, cash on hand of $2.6 billion will fund all of the company’s obligations and expenses for the next 12 months.
The company threw off $864 million from operations in its first fiscal quarter, against which it – among other expenditures – bought back $400 million of its own stock. KLAC also paid out $163 million in dividends, or $1.05 per share, and a 17% increase from the prior quarter.
And behind financial strength and earnings momentum is increasing demand for semiconductors worldwide in the form of a one-two punch. In addition to governments mobilizing to increase production as a means of weaning their economies from reliance on South Korean and Taiwanese chip giants Samsung and Taiwan Semiconductor (TSM), the digitization of daily life is putting chips in everything from doorbells to automotive systems. All of this makes KLAC one of the best semiconductor stocks going forward.
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Kulicke and Soffa IndustriesGetty Images
Market value: $3.7 billionDividend yield: 1.2%Kulicke and Soffa Industries (KLIC, $58.63) provides semiconductor manufacturing equipment and services. By almost any measure, 2021 was gangbusters for KLIC.
Fiscal-year revenues jumped 144%, while earnings and earnings per share were up sevenfold. A look at the company’s fourth-quarter report shows why bottom-line performance far outstripped top-line growth: net and operating margins were up almost 2 percentage points each.
Margin expansion is evident in the fiscal 2021 report versus 2020 too, but is distorted because a pandemic-related dip in revenues during the final three quarters of 2020 dramatically shrank margins.
And these two facts explain the KLIC story well. The company benefited from easy comparables in fiscal 2021 versus the year-ago period – and could represent a tough act to follow in 2022. This has cooled sentiment and the consensus sales and earnings forecasts are flat.
So, for Kulicke & Soffa, momentum investors need not apply. But investors with a longer-term horizon looking for the best semiconductor stocks could be well rewarded.
This proposition stems from two macro drivers. More generally, the global expansion in demand for semiconductors. And more specifically, the conversion to electric vehicles in the automotive market. You see, EVs, which are perhaps computers first and automobiles second, are loaded to the gills with semiconductors. Both trends play well into KLIC’s hands with a large, diverse client base and a leadership position in the automotive market.
Notably, KLIC has no fixed long- or short-term debt and hosts a conservative balance sheet with a debt- (in this case, just liabilities that do not carry fixed payment obligations) to-equity ratio of 0.5x. This is comforting.
While the global macro of expanding demand is indisputable, that doesn’t make the semiconductor business an easy one. And Kulicke & Soffa’s strong financial position may enable it to manage what vicissitudes that will inevitably befall the semiconductor industry.
And if you have to wait, KLIC is not a bad company to wait with. The dividend is a tad above 1%, but was just raised about 21% to an annual rate of 64 cents per share – a decent bump from 48 cents per share it paid in 2018.
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Marvell TechnologyGetty Images
Market value: $69.4 billionDividend yield: 0.3%Marvell Technology (MRVL, $82.21) is starting to look like the Marvell of the early 2000s – when the stock soared 600% in just three years before coming down to earth due in part to the overall downdraft during the Great Recession. In the past three years, the stock has made a similar move. For investors, the question is: Will history repeat itself?
There is perhaps no more hubris-laden speculation than, “It’s different this time,” but in the case of MRVL, perhaps it is indeed.
Marvell, which makes semiconductors for data storage, communications and consumer markets, demonstrated momentum on its top line in 2021. But the company was also busy with a pair of acquisitions that could ultimately prove transformative.
First the momentum. With the latest report in early December, Marvell has now logged six straight quarters of revenue growth. The most recent quarter also showed year-over-year revenue growth of 61%.
But Marvell reported a net loss for its fiscal third-quarter of about $63 million, and it showed a loss in the year-ago period. In fact, profits have seesawed at Marvell for some time. The company is expected to deliver a loss in its fiscal 2022 (calendar year 2021), but was profitable in fiscal 2020. Likewise, the prior year, fiscal 2019, showed a loss, but the 12-month period before that was profitable.
An investor might ask, where is the upside in this earnings volatility?
For starters, losses at Marvell can be attributed in part to an outsized commitment to research and development (R&D). Through the first nine months of 2021, Marvell spent $1 billion on R&D, or about a third of its revenues. Compare that to semiconductor giant Intel (INTC), which spent “just” 19% of its revenues on R&D over the same time frame.
To the degree that R&D is discretionary in a way that other costs are not, some investors might see management’s commitment to forego current profits as the kind of long-term thinking that other management teams are castigated for not doing.
And long term, Marvell is committed to attaching itself to growth in the cloud computing business. Both of Marvell’s acquisitions this year – Inphi and Innovium – will add top-line revenues. More importantly, they will help Marvell sell more chips that go into the switches used to move information inside massive data centers owned by cloud players like Amazon.com (AMZN) and Microsoft (MSFT), among others. This move also flanks Broadcom (AVGO), which holds a dominant position in the data center market.
Data center spending is going through the roof as companies gear up for artificial intelligence (AI) and cloud computing. Much of Microsoft’s $24 billion in capital expenditures went toward data center infrastructure.
Meanwhile, transformation in the automotive business toward EVs and in communications with the rollout of 5G are also driving growth in large end markets for Marvell.
All of this froth is reflected in the sentiment for Marvell shares. In the last 30 days, 27 analysts have revised their 2022 earnings forecast upward. But shares are not cheap and are currently trading at 56 times forecasted earnings and 18 times trailing one-year sales.
But for investors who believe in the power of long term strategy, and have conviction in the growth of Marvell’s end markets, today’s share prices may be cheap longer term.
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NvidiaGetty Images
Market value: $682.8 billionDividend yield: 0.1%To make a case for optimism toward growth in Nvidia’s (NVDA, $274.00) top and bottom lines is to make one for larger investments in data centers, as businesses and governments continue to deploy AI on enterprise scale.
For instance, in gaming – the company’s largest segment – CFRA Research notes that just 25% of the company’s installed base has upgraded to Nvidia’s Ampere graphics processing architecture. This adds some further heft to the current upgrade cycle, hence earnings growth.
These trends are on full display on NVDA’s top and bottom lines. Since fiscal 2017, revenues have grown from $6.9 billion to an average consensus of $26.7 billion for fiscal 2022 (which will end Jan. 31, 2022) – an average annual growth rate of more than 25%. Earnings per share have been even more impressive, growing from 64 cents to the average estimate of $4.34 for fiscal 2022, nearly 38% growth annually.
If Nvidia’s current fiscal year ends the way analysts’ consensus forecast indicates it will, revenue will be up 60% and earnings 74% versus fiscal 2021.
Nvidia, which develops graphics processors for gaming, multimedia and AI applications, has been on fire over the last five years, but at about $270 per share, is well off its recent high of $346. For intrepid investors, this might offer an entry point to start building a position in one of the best semiconductor stocks there is.
The wild card for NVDA right now is the pending acquisition of ARM, which develops and licenses semiconductor architectures and designs. The Federal Trade Commission (FTC) has taken a dim view of the deal, initiating a lawsuit in early December to block it.
The transaction was initially valued at $40 billion when it was announced in September 2020, but with the longer-term rise in NVDA shares – they’ve more than doubled since the deal was first reported – ARM would cost nearly $75 billion.
The waning fortunes surrounding the potential acquisition have accounted for almost all of the decline in Nvidia’s share price, which was at near an all-time high before the FTC announcement.
Given Nvidia’s organic growth and the macros that are in place, the long-term impact of the deal may not be material. Certainly the scuttling of the deal will diminish Nvidia’s ability to dominate the AI business the way Taiwan Semiconductor dominates chip manufacturing, but it will not undermine continued and impressive earnings growth.
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SiTimeGetty Images
Market value: $4.9 billionDividend yield: N/ASiTime (SITM, $239.56) makes silicon-based timing products for use in electronic equipment from mobile phones to graphics and identity cards. Timing is critical to the functioning of digital processing, and the more environments silicon-based – as opposed to quartz – timing devices can be used, the more areas advanced processing can be deployed. As they say, timing is everything.
The company estimates there are one to two timing chips per device today, creating a market for 40 billion units. But this will grow to 125 billion units in 2030 as silicon-based timing applications proliferate and as consumers and industries own more connected devices.
SiTime financial results this year reflect the growth in timing devices, with revenues up sequentially from $36 million in the first quarter to $45 million in the second to $63 million in the third. Plus, third-quarter net earnings swung to 66 cents per share from a net loss of 4 cents per share in the year-ago period. The company also recorded a loss in 2019. But for both of those years, it looks like stock-based compensation – which is non-cash – was the culprit. SiTime’s operating cash flow per share was actually $1.03 per share and 70 cents per share in 2020 and 2019, respectively.
Adjusting the net income by taking out non-recurring and non-expenses can be a tricky business. Sometimes it leads to valuable insights and sometimes it leads to meh.
In this case, the seemingly outsized level of stock-based compensation – large enough to wipe out the profits of the company, at least on a theoretical basis – suggests that management is well-incentivized to maintain the momentum in sales and earnings, and for some investors that may be enough to take the plunge on one of the best semiconductor stocks around.