published 10 January 2023
The prospects were high for the best semiconductor stocks heading into 2022, but the industry has been hit by curveballs over the last year that have upended the market.
Take for instance the Biden administration’s tech war against China, which restricts the country from buying advanced chips and equipment from the U.S. Further, China’s COVID-related lockdowns in key cities where chipmaking factories reside added strain to an already disrupted supply chain. And when those logistics issues began to ease, demand for chips which peaked during the pandemic had also started to decline.
Add to that the prevalent negative economic sentiment due to the Fed hiking interest rates.
Still, the semiconductor landscape is not completely bleak. Many of the same potential drivers for semiconductor stocks that were in place this year are still relevant in 2023: The transformation of the automotive market toward electric vehicles (EVs) and the expansion of 5G.
There’s also the continued 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. The easing of supply-chain issues could bring focus back to these catalysts next year.
This has certainly been one of the most difficult years for semiconductor stocks in recent memory. But for intrepid investors, it may represent what history will show was one of the greatest buying opportunities ever.
With that in mind, here are five of the best semiconductor stocks to buy now. 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. 9. 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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KLA Market value: $58.4 billionDividend yield: 1.4%The investment thesis for KLA (KLA (opens in new tab), $408.33) which offers semiconductor manufacturing solutions, is simple: fundamentals and industry outlook. And it’s one that remains intact following the company’s fiscal first-quarter earnings report.
Revenue and GAAP earnings were up 30% and 3% year-over-year, respectively. The reported revenue of $2.72 billion is consistent with the higher end of KLA’s guidance range of $2.47 billion-$2.72 billion.
KLA also expects to sustain its bottom-line growth, with earnings per share (EPS) guidance of $7.34 for the fiscal second quarter. This would represent about a 2% sequential growth at the top end of the range.
The company sports a decent balance sheet with good liquidity, and operating cash flow exceeded $1 billion in the first quarter. Its free cash flow (cash from operations less capital expenditures), on the other hand, grew to $927 million – a 24% increase from the previous quarter and 37% year-over-year.
Sales growth, guidance for continued EPS improvement and a decent balance sheet is probably what insulated KLAC shares from the overall downdraft in semiconductor stocks. Shares are off just 5% in the past 12 months (less if you net out the 1.35% dividend), versus the iShares Semiconductor ETF (SOXX (opens in new tab)), which is down 30%.
This is not an entirely logical constellation, however. Semiconductor supply companies face a big concentration as there are a limited number of customers big enough to service the foundries and related companies. So, when one or all of these customers face troubles, it can spell trouble for KLA too. Though Taiwan Semiconductor (TSM (opens in new tab)) and Advanced Micro Devices (AMD (opens in new tab)) are still growing, for example, Nvidia’s (NVDA (opens in new tab)) sales contracted in the most recent quarter. This trend bears watching.
Notwithstanding, a sure sign of management confidence – or hubris – is KLA’s use of cash, the largest expenditure of which were for the company’s stock buybacks and payments of dividends to shareholders, at 82% of free cash flow. All in, KLA returned a total of $1.33 billion to shareholders in the 12 months ending September 2022. For a company with a market cap of around $60 billion, this is a big number.
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, 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. The stock has been rallying since October but is still lower on a year-over-year basis, which makes now a good time to consider KLA shares.
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Kulicke and Soffa Industries Market value: $2.7 billionDividend yield: 1.7%Kulicke and Soffa Industries (KLIC (opens in new tab), $47.99), which provides semiconductor manufacturing equipment and services, had stellar 2021 results. These comparisons make 2022 look not quite as good.
In its fiscal fourth-quarter report ended Oct. 1, the company reported a 41% and 47% year-over-year decrease in revenue and earnings, respectively. Adding to the pain, fiscal 2022 revenues were flat. The stock has also lost the favor of many analysts, suffering from earnings estimate cuts. This, combined with a bearish landscape, may make for continued tough sledding in KLIC shares. And the sledding has been tough already, with shares off about 16% in the past 12 months. Still, this is better than the SOX semiconductor index, which is off 30%.
Like KLA, Kulicke and Soffa faces a concentration risk where relatively few customers can disproportionately impact earnings, and if you sell to semiconductor manufacturers and related companies, there’s not that many customers to be had. In 2021 and 2022, KLIC had customers who accounted for approximately 17% of sales in each year.
To broaden its product portfolio and strengthen its capabilities, KLIC acquired high-precision micro dispensing equipment manufacturer, Advanced Jet Automation. The acquisition will allow Kulicke and Soffa to tap into the $2 billion dispensing equipment market and could be a long-term growth driver.
If you own KLIC and are waiting it out, there are worse shares to wait with. KLIC is a solid choice among semiconductor stocks for income investors too. It is yielding about 1.7%, and the company has averaged annual dividend growth of roughly 30% since 2018, when it was instituted.
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Marvell Technology Market value: $31.5 billionDividend yield: 0.7%Everything seems to still be moving in the right direction at Marvell Technology (MRVL (opens in new tab), $36.92), except for the share price which is off about 57% in the past 12 months. Off the charts, though, the company – which makes semiconductors for data storage, communications and consumer markets – is still displaying a relatively strong momentum.
Although Marvell missed earnings estimates in their third quarter of fiscal 2023, the company had record revenue of $1.5 billion, up 27% year-over-year. It also reported GAAP earnings of 2 cents per share, up from a loss of 8 cents per share a year ago.
MRVL is not impervious to the headwinds facing the semi industry such as weakening demand in the consumer sector, but it was able to maintain growth in other end markets. This was particularly true in the data center market, where the revenue rose to $627 million, up 26% year-over-year. Marvell’s overexposure to data centers, however, could still pose a problem if demand starts to moderate in this market. Still, management appears confident in the company’s long-term growth drivers, with a planned launch of its cloud-optimized design in 2024.
When looking at Marvell, or for that matter, most tech stocks, the earnings per share is not always the best measurement for success. A look at Marvell’s statement of cash flows shows that stock-based compensation, depreciation and amortization of intangible assets totaled nearly $500 million for the most recently reported quarter, a figure which dwarfs reported net income of $13 million.. Also notable also is the company’s commitment to research and development, spending nearly $450 million in the last quarter. Clearly, MRVL is looking to the future, though what the future looks like, beyond continued, if albeit lumpy expansion, remains difficult to discern.
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Nvidia Market value: $389.5 billionDividend yield: 0.1%Nvidia’s (NVDA (opens in new tab), $156.28) share price has been on a roller-coaster ride this year. The stock was down more than 61% for the year-to-date in October after the U.S. government initiated new restrictions on chip exports to China. NVDA seems to have found its footing since then and is starting to gain momentum.
For its fiscal 2023 third quarter report, Nvidia barely beat analysts’ revenue expectations and missed earnings per share estimates. Its revenue was down 17% year-over-year, and off 12% from the previous quarter.
The company’s gaming division also announced a 51% year-on-year decline in sales in its Q3 report. Its data center division remains strong, however, with revenue of $3.83 billion, up 31% from the year-ago figure – a silver lining for investors since data center represents 65% of NVDA’s third-quarter revenue by end market. Gaming, on the other hand, represents only 25%.
And while many chip companies have been hammered by the U.S. export controls that affected demand from Chinese companies, Nvidia found a way to circumvent this rule. The firm introduced a new graphics processing chip, the A800, that can be exported to China under the new U.S. export restrictions on AI (artificial intelligence) chipsets.
The A800 has the same processing power of its flagship A100 chip, but has a narrower interconnect bandwidth to receive data from other chips, which is critical for AI applications. Specifically, while the A100 can send data at 600 gigabytes per second, the A800 can only transmit data at 400 gigabytes per second.
Nvidia has solid fundamentals and arguably remains the best AI stock among semis, but it isn’t out of the woods yet. Its rising inventory levels, now at $4.45 billion – a 71% year-over-year rise due to weakening demand for its graphics processing units – can present a problem in the future. Funds tied up in unsold units could affect its earnings and cash flow.
Jensen Huang, founder and CEO of NVIDIA, said that the company is “quickly adapting to the macro environment, correcting inventory levels,” but a continuing inventory buildup might trigger a selloff. For investors who believe in chipmakers and who believe in NVDA, today’s prices represent a good entry point in one of the best semiconductors stocks there is.
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SiTime Market value: $2.3 billionDividend yield: N/ASiTime (SITM (opens in new tab), $108.06) 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. Timing, as they say, 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.
SITM demonstrated significant momentum during 2021, with revenue doubling from $36 million in the first quarter of the year to $76 million in the fourth quarter. Although revenue growth has been relatively flat this year, SiTime was able to maintain its revenue above $70 million for all three quarters of 2022.
Sequentially, SiTime is holding up too. For the third quarter, revenues were off “just” 8% from Q2, a big number, but laudable in today’s semiconductor market. Investors should expect more of the same, however, as the company’s guidance forecasts a decline of 15% to 20% in Q4. The only upside here is that this expectation has now been baked into the share price.
When assuring investors, SITM notes design wins, its leadership position, and quote activity, which are important. But better pricing and more repeat business, both of which SiTime is positioned to realize, may be what moves the needle on sales and earnings.
SITM is a small-cap stock, and small companies can get buffeted by circumstances well beyond their control. And while this may well be the case with SiTime, for believers in semis, the timing market, and SiTime’s place in it, current prices represent a viable entry point in one of the best semiconductor stocks out there.
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