The demand for semiconductors has grown significantly over the past few years due to its increasing application across different industries. Given the anticipated increase in demand for advanced chips in sectors such as electronics, automotive, and AI technology, there will be sustained investor attention on chip stocks.
In this piece, I have discussed the reasons why chip stocks Tower Semiconductor Ltd. (TSEM), Diodes Incorporated (DIOD), and Photronics, Inc. (PLAB) can be better investments than well-known Advanced Micro Devices, Inc. (AMD).
Before diving deeper into these stocks, let’s discuss why AMD is best avoided now and what’s driving the chip industry’s growth.
In today’s day and age, semiconductors have become crucial to power various applications across the consumer electronics, defense, automotive, telecommunication, data center, and healthcare industries. The importance of chips can be gauged from their sales, which reached their highest level last year despite witnessing a slowdown during the second half of last year.
The slowdown was primarily due to the decline in demand from the end-user markets because of macroeconomic headwinds. According to Gartner, global semiconductor revenues will decline 11.2% in 2023. However, sales are expected to rise 18.5% year-over-year to $630.90 billion in 2024.
AMD has faced a few challenging quarters due to the slowdown in the end-user markets. Falling sales of personal computers and the slowdown in the data center segment due to soft enterprise demand and higher cloud inventory levels have kept its revenues under pressure.
For the second quarter ended July 1, 2023, AMD’s revenue declined 18% year-over-year to $5.36 billion. Its non-GAAP gross profit decreased 25% over the prior-year quarter to $2.67 billion.
In addition, its non-GAAP net income declined 44% year-over-year to $948 million. Also, its non-GAAP EPS came in at $0.58, representing a decline of 45% year-over-year. The company is now focusing on making chips for artificial intelligence (AI) applications, but it faces tough competition from Nvidia Corporation (NVDA).
On October 10, 2023, AMD announced signing an agreement to acquire Nod.ai to enhance its open AI software capabilities. For the third quarter, AMD expects its revenue to be approximately $5.7 billion, plus or minus $300 million, and its non-GAAP gross margin is expected to be about 51%.
Baird’s analysts have lowered their fiscal 2024 estimates for AMD due to the lower revenue outlook of its data center business. They decreased their price target to $125 from $170. Many analysts believe AMD could rival NVDA in producing advanced AI chips to power large language model (LLM) based chatbots like ChatGPT. However, analysts are concerned that their AI strategy could be too ambitious.
AMD is trading at an expensive valuation. In terms of forward EV/EBITDA, AMD’s 44.18x is 223.2% higher than the 13.67x industry average. Likewise, its 7.56x forward EV/Sales is 197.7% higher than the 2.54x industry average. Its 39.55x forward non-GAAP P/E is 82.2% higher than the 21.71x industry average.
Over the past three months, the stock has declined 5.1% but gained 88.1% over the past year to close the last trading session at $108.79.
Investors could consider buying TSEM, DIOD, and PLAB, considering these factors. Let’s analyze the fundamentals of these three Semiconductor & Wireless Chip stocks, starting with the third choice.
Stock #3: Tower Semiconductor Ltd. (TSEM)
Headquartered in Migdal Haemek, Israel, TSEM is an independent semiconductor foundry that manufactures and markets analog-intensive mixed-signal semiconductor devices in the United States, Japan, other Asian countries, and Europe.
On September 7, 2023, TSEM and InnoLight Technology announced their collaboration to develop multi-generation high-speed optical transceivers based on TSEM’s Silicon Photonics process platform (PH18). With production already underway, this strategic partnership is expected to enable cutting-edge solutions to support the growing demands of AI, data centers, and next-generation networks.
On September 5, 2023, TSEM and Intel Foundry Services (IFS) announced an agreement under which IFS will provide foundry services and 300mm manufacturing capacity to help TSEM serve its customers globally. Under the agreement, TSEM will utilize Intel’s advanced manufacturing facility in New Mexico.
TSEM will invest up to $300 million to acquire and own equipment and other fixed assets to be installed in the New Mexico facility, providing a new capacity corridor of over 600,000 layers per month for TSEM’s future growth, enabling capacity to support forecasted customer demand for 300mm advanced analog processing.
In terms of the trailing-12-month EBIT margin, TSEM’s 17.87% is 263.9% higher than the 4.91% industry average. Likewise, its 10.85% trailing-12-month Return on Total Assets is significantly higher than the industry average of 0.37%. Its 0.64x trailing-12-month asset turnover ratio is 2.7% higher than the industry average of 0.62x.
TSEM’s operating profit for the first half year that ended June 30, 2023, increased 4.6% year-over-year to $139.94 million. The company’s net profit attributable to the company rose 9.3% year-over-year to $122.59 million. Its EPS came in at $1.10, representing an increase of 8.9% year-over-year.
Analysts expect TSEM’s EPS and revenue for fiscal 2024 are expected to increase 10.3% and 6.7% year-over-year to $2.29 and $1.53 billion, respectively. It surpassed the consensus EPS estimates in three of the trailing four quarters. Over the past month, the stock has declined 19.8% to close the last trading session at $22.46.
TSEM’s POWR Ratings reflect solid prospects. It has an overall rating of B, equating to a Buy in our proprietary rating system. The POWR Ratings assess stocks by 118 different factors, each with its own weighting.
It is ranked #17 out of 90 stocks in the Semiconductor & Wireless Chip industry. It has an A grade for Momentum and a B for Value. Click here to see the additional ratings of TSEM for Growth, Stability, Sentiment, and Quality.
Stock #2: Diodes Incorporated (DIOD)
DIOD manufactures and supplies application-specific standard products in the broad discrete, logic, analog, and mixed-signal semiconductor markets worldwide. The company offers discrete semiconductor products, such as MOSFET, TVS, and performance Schottky rectifiers; GPP bridges and rectifiers, and performance Schottky diodes; performance Zener diodes, bridge rectifiers; switching diodes, etc.
On September 12, 2023, DIOD announced that it launched a boost/single-ended primary inductance converter (SEPIC) controller for various automotive LED applications. The AL8853AQ is an automotive-compliant and highly integrated boost/SEPIC controller that provides high performance with a reduced bill of materials (BOM) in automotive LED applications.
In terms of the trailing-12-month EBITDA margin, DIOD’s 26.51% is 189.7% higher than the 9.15% industry average. Likewise, its 11.20% trailing-12-month Capex/Sales is 362.3% higher than the industry average of 2.42%. Its 16.99% trailing-12-month net income margin is 704.2% higher than the industry average of 2.11%.
For the fiscal second quarter ended June 30, 2023, DIOD’s net sales came in at $467.15 million. Its non-GAAP EBITDA increased 2.1% year-over-year to $133.45 million. The company’s non-GAAP net income and EPS stood at $73.33 million and $1.59, respectively. Also, its cash flow from operations rose 8.9% over the prior-year quarter to $92.60 million.
Street expects DIOD’s EPS and revenue for fiscal 2024 are expected to increase 4.9% and 2.3% year-over-year to $5.80 and $1.82 billion, respectively. It surpassed the Street EPS estimates in three of the trailing four quarters. Over the past year, the stock has gained 20.4% to close the last trading session at $80.02.
DIOD’s positive outlook is reflected in its POWR Ratings. It has an overall rating of B, equating to a Buy in our proprietary rating system.
It has an A grade for Value and a B for Momentum. Within the same industry, it is ranked #9. To see the other ratings of DIOD for Growth, Stability, Sentiment, and Quality, click here.
Stock #1: Photronics, Inc. (PLAB)
PLAB engages in the manufacture and sale of photomask products and services worldwide. The company offers photomasks used to manufacture integrated circuits and flat panel displays (FPDs); and to transfer circuit patterns onto semiconductor wafers, FDP substrates, and various electrical and optical components.
In terms of the trailing-12-month EBIT margin, PLAB’s 28.44% is 479.1% higher than the 4.91% industry average. Likewise, its 13.02% trailing-12-month Return on Common Equity is 982.8% higher than the industry average of 1.20%. Its 13.48% trailing-12-month net income margin is 538.1% higher than the industry average of 2.11%.
PLAB’s revenue for the fiscal third quarter ended July 30, 2023, increased 1.9% year-over-year to $224.21 million. The company’s operating income increased 2.4% year-over-year to $65.26 million. Its non-GAAP net income rose 9.7% year-over-year to $31.64 million. Additionally, its non-GAAP EPS came in at $0.51, representing an increase of 8.5% over the prior-year quarter.
For the quarter ending October 31, 2023, PLAB’s revenue is expected to increase 6.5% year-over-year to $224 million. Its EPS for the quarter ending January 31, 2024, is expected to increase 22.5% year-over-year to $0.49. It surpassed the consensus EPS estimate in three of the trailing four quarters. Over the past year, the stock has gained 43.9% to close the last trading session at $21.03.
PLAB’s strong fundamentals are reflected in its POWR Ratings. It has an overall rating of B, which translates to a Buy in our proprietary rating system.
It is ranked #6 in the Semiconductor & Wireless Chip industry. It has an A grade for Momentum and a B for Value and Quality. Click here to see the other ratings of PLAB for Growth, Stability, and Sentiment.
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DIOD shares were trading at $78.84 per share on Friday afternoon, down $1.18 (-1.47%). Year-to-date, DIOD has gained 3.55%, versus a 14.17% rise in the benchmark S&P 500 index during the same period.
About the Author: Dipanjan Banchur
Since he was in grade school, Dipanjan was interested in the stock market. This led to him obtaining a master’s degree in Finance and Accounting. Currently, as an investment analyst and financial journalist, Dipanjan has a strong interest in reading and analyzing emerging trends in financial markets.
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