Semiconductors are the picks and shovels of modern technology. 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 39.2% while the S&P 500 was down 2.1%.
Nevertheless, a cautious approach is imperative because Moore’s Law (a principle stating that computer productivity doubles every two years) will eventually make even the most impactful technologies today obsolete. With that said, here are two semiconductor stocks boasting durable advantages and one we’re steering clear of.
One Semiconductor Stock to Sell:
Qualcomm (QCOM)
Market Cap: $132.4 billion
Having been at the forefront of developing the standards for cellular connectivity for over four decades, Qualcomm (NASDAQ: QCOM) is a leading innovator and a fabless manufacturer of wireless technology chips used in smartphones, autos and internet of things appliances.
Why Do We Think Twice About QCOM?
- Estimated sales decline of 5% for the next 12 months implies a challenging demand environment
Qualcomm is trading at $126.85 per share, or 12.1x forward P/E. To fully understand why you should be careful with QCOM, check out our full research report (it’s free).
Two Semiconductor Stocks to Watch:
Monolithic Power Systems (MPWR)
Market Cap: $58.51 billion
Founded in 1997 by its longtime CEO Michael Hsing, Monolithic Power Systems (NASDAQ: MPWR) is an analog and mixed signal chipmaker that specializes in power management chips meant to minimize total energy consumption.
Why Are We Backing MPWR?
- Annual revenue growth of 27% over the last five years was superb and indicates its market share increased during this cycle
- Free cash flow margin jumped by 7.1 percentage points over the last five years, giving the company more resources to pursue growth initiatives, repurchase shares, or pay dividends
- Market-beating returns on capital illustrate that management has a knack for investing in profitable ventures
At $1,230 per share, Monolithic Power Systems trades at 55x forward P/E. Is now the right time to buy? See for yourself in our full research report, it’s free.
Western Digital (WDC)
Market Cap: $105.8 billion
Founded in 1970 by a Motorola employee, Western Digital (NASDAQ: WDC) is a leading producer of hard disk drives, SSDs and flash memory.
Why Do We Like WDC?
- Market share is on track to rise over the next 12 months as its 32.6% projected revenue growth implies demand will accelerate from its two-year trend
- Efficiency rose over the last five years as its Operating margin increased by 16.1 percentage points
- Free cash flow margin grew by 14.7 percentage points over the last five years, giving the company more chips to play with
Western Digital’s stock price of $328.38 implies a valuation ratio of 26.9x forward P/E. Is now a good time to buy? Find out in our full research report, it’s free.
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