Semiconductors are the core infrastructure powering the Information Age. Still, they’re subject to swings in the broader economy because customers often stockpile chips ahead of demand, and investors seem to believe that inventory levels are correcting - over the past six months, the industry has shed 2.8%. This performance was disappointing since the S&P 500 stood firm.
Some companies can grow regardless of the economic backdrop, but the odds aren’t great for the ones we’re analyzing today. Taking that into account, here are three semiconductor stocks we’re steering clear of.
Intel (INTC)
Market Cap: $94 billion
Inventor of the x86 processor that powered decades of technological innovation in PCs, data centers, and numerous other markets, Intel (NASDAQ: INTC) is a leading manufacturer of computer processors and graphics chips.
Why Is INTC Risky?
- Customers postponed purchases of its products and services this cycle as its revenue declined by 6.9% annually over the last five years
- Inability to adjust its cost structure while its revenue declined over the last five years led to a 46.7 percentage point drop in the company’s operating margin
- 25 percentage point decline in its free cash flow margin over the last five years reflects the company’s increased investments to defend its market position
Intel is trading at $21.54 per share, or 35.8x forward P/E. Read our free research report to see why you should think twice about including INTC in your portfolio.
Vishay Intertechnology (VSH)
Market Cap: $2.05 billion
Named after the founder's ancestral village in present-day Lithuania, Vishay Intertechnology (NYSE: VSH) manufactures simple chips and electronic components that are building blocks of virtually all types of electronic devices.
Why Do We Pass on VSH?
- Products and services are facing significant end-market challenges during this cycle as sales have declined by 9.1% annually over the last two years
- Performance over the past five years shows its incremental sales were much less profitable, as its earnings per share fell by 25.4% annually
- Free cash flow margin shrank by 15.4 percentage points over the last five years, suggesting the company is consuming more capital to stay competitive
At $15.09 per share, Vishay Intertechnology trades at 7.3x forward EV-to-EBITDA. Check out our free in-depth research report to learn more about why VSH doesn’t pass our bar.
Power Integrations (POWI)
Market Cap: $3.05 billion
A leading supplier of parts for electronics such as home appliances, Power Integrations (NASDAQ: POWI) is a semiconductor designer and developer specializing in products used for high-voltage power conversion.
Why Do We Steer Clear of POWI?
- Flat sales over the last five years suggest it must find different ways to grow during this cycle
- Costs have risen faster than its revenue over the last five years, causing its operating margin to decline by 11.7 percentage points
- Earnings per share have contracted by 19.6% annually over the last five years, a headwind for returns as stock prices often echo long-term EPS performance
Power Integrations’s stock price of $53.88 implies a valuation ratio of 31.6x forward P/E. If you’re considering POWI for your portfolio, see our FREE research report to learn more.
High-Quality Stocks for All Market Conditions
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