Semiconductors are the silicon backbone of the digital revolution. The amount of data we ingest is also increasing exponentially, leading to elevated demand for chips with more processing power. This secular trend bodes well for the industry, which has posted a six-month gain of 50.2% and beaten the S&P 500 by 39.1 percentage points.
Although these businesses have produced results lately, investors should tread carefully as not all companies are equipped for the next technological innovation. On that note, here is one semiconductor stock boasting a durable advantage and two we’re passing on.
Two Semiconductor Stocks to Sell:
NXP Semiconductors (NXPI)
Market Cap: $60.45 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 Does NXPI Give Us Pause?
- Products and services are facing end-market challenges during this cycle, as seen in its flat sales over the last two years
- Estimated sales growth of 15.4% for the next 12 months is soft and implies weaker demand
NXP Semiconductors’s stock price of $240.50 implies a valuation ratio of 13.9x forward P/E. If you’re considering NXPI for your portfolio, see our FREE research report to learn more.
Universal Display (OLED)
Market Cap: $4.19 billion
Serving major consumer electronics manufacturers, Universal Display (NASDAQ: OLED) is a provider of organic light emitting diode (OLED) technologies used in display and lighting applications.
Why Does OLED Fall Short?
- Sales tumbled by 1.3% annually over the last two years, showing market trends are working against it during this cycle
- Demand will likely be soft over the next 12 months as Wall Street’s estimates imply tepid growth of 8.2%
- Earnings per share lagged its peers over the last five years as they only grew by 1.1% annually
At $91.10 per share, Universal Display trades at 19.3x forward P/E. Check out our free in-depth research report to learn more about why OLED doesn’t pass our bar.
One Semiconductor Stock to Watch:
Applied Materials (AMAT)
Market Cap: $428.1 billion
Founded in 1967 as the first company to develop tools for other businesses in the semiconductor industry, Applied Materials (NASDAQ: AMAT) is the largest provider of semiconductor wafer fabrication equipment.
Why Are We Fans of AMAT?
- Highly efficient business model is illustrated by its impressive 29.1% operating margin
- Share repurchases have increased shareholder returns as its annual earnings per share growth of 13.2% exceeded its revenue gains over the last five years
- ROIC punches in at 46.2%, illustrating management’s expertise in identifying profitable investments
Applied Materials is trading at $542.22 per share, or 34.9x forward P/E. Is now the time to initiate a position? See for yourself in our comprehensive research report, it’s free.
Stocks We Like Even More
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