While the shortage of semiconductor chips that began with the pandemic-led changes in demand and supply was continuing, the Russia-Ukraine war aggravated the crisis. Furthermore, the ongoing Taiwan-China tensions could potentially risk semiconductor supplies from Taiwan.
Despite the continued chip shortage, the ever-increasing demand for semiconductors due to their extensive usage in electronics, critical infrastructure, electric vehicles, and other industries has helped the industry benefit from price increases. Furthermore, increasing government and corporate spending to ramp up production should boost the industry’s growth in the coming months.
Moreover, President Joe Biden is set to sign the Chips and Science Act. The bipartisan bill aims to provide domestic semiconductor manufacturers with $52 billion in subsidies to cut reliance on foreign sourcing, increase competitiveness with China and other foreign rivals, and create local employment opportunities in due process.
Given the industry’s solid growth prospects with the advancement of the Chips bill, fundamentally sound semiconductor stocks Broadcom Inc. (AVGO), Qualcomm Inc. (QCOM), and Semtech Corporation (SMTC) could be ideal investments now.
Broadcom Inc. (AVGO)
AVGO develops and supplies various semiconductor devices worldwide. The company operates in two segments: Semiconductor Solutions; and Infrastructure Software.
Its offerings include set-top box system-on-chips (SoCs), ethernet switching and routing merchant silicon products, fiber optic transmitter and receiver components, internet protocol (IP) licensing, radio frequency (RF) semiconductor devices, custom touch controllers, and connectivity solutions.
On May 26, AVGO announced that it would acquire VMware Inc. (VMW), a leading innovator in enterprise software, in a cash-and-stock transaction for nearly $61 billion. Following the transaction’s closing, the Broadcom Software Group would be rebranded and operated as VMware.
The company is expected to expand its offerings and add approximately $8.5 billion of pro forma EBIDTA from the acquisition within three years.
Also, in the same month, AVGO delivered the world’s first 50G automotive ethernet switch device, the BCM8958X, designed to address the growing bandwidth needed for in-vehicle networking applications and accelerates the adoption of software-defined vehicles.
The development would augment automotive networking with unprecedented real-time capabilities and cost efficiencies in the ever-growing connected mobility solutions era.
AVGO’s net revenue increased 22.6% year-over-year to $8.10 billion in the fiscal 2022 second quarter ended May 1, 2022. Its operating income grew 71.9% year-over-year to $3.39 billion.
The company’s adjusted EBITDA rose 29.1% year-over-year to $14.50 billion. Its non-GAAP net income improved 34.2% year-over-year to $4 billion. The company’s non-GAAP EPS increased 37% from its year-ago value to $9.07.
The consensus EPS estimate of $36.97 for the fiscal year 2022 (ending October 2022) represents a 31.9% improvement year-over-year. The consensus revenue estimate of $32.99 billion for the current year represents a 20.2% increase year-over-year. The company has an impressive earnings surprise history, as it surpassed the consensus EPS estimates in each of the trailing four quarters.
The stock has gained 18.1% over the past month and 13.1% over the past year to close the last trading session at $551.44.
AVGO’s POWR Ratings reflect this promising outlook. The stock has an overall rating of A, which translates to Strong Buy in our proprietary rating system. The POWR Ratings assess stocks by 118 different factors, each with its own weighting.
AVGO has a grade of A for Growth and Quality. It has a B grade for Sentiment. Within the B-rated Semiconductor & Wireless Chip industry, it is ranked #6 of 94 stocks.
To see additional POWR Ratings for Stability, Value, and Momentum for AVGO, Click here.
Qualcomm Inc. (QCOM)
QCOM is engaged in developing and commercializing foundational technologies for the global wireless industry. The company operates through three segments: Qualcomm CDMA Technologies (QCT); Qualcomm Technology Licensing (QTL); and Qualcomm Strategic Initiatives (QSI).
The company develops and supplies integrated circuits, system software, and other technologies for wireless communications, networking, and global positioning system products. In addition, QCOM grants rights and licenses to use portions of its intellectual property portfolio and invests in early-stage companies in various industries.
In July, QCOM expanded its strategic partnership with Samsung Electronics Co., Ltd. (KRX) through 2030 for 3G, 4G, 5G, and upcoming 6G mobile technology.
According to Cristiano Amon, QCOM’s president and chief executive officer, “For more than two decades, we’ve worked together to lead the industry, and we are pleased to continue this strategic partnership to develop innovative technologies and products using Snapdragon platforms to power more Samsung premium devices globally.” This development is expected to add to the stability and growth in QCOM’s earnings in the years ahead.
In the fiscal 2022 third quarter ended June 26, 2022, QCOM’s net revenues increased 36.7% year-over-year to $10.93 billion. The company’s non-GAAP EBIT came in at $3.89 billion, up 53% from the prior-year period. Its non-GAAP net income improved 52.5% year-over-year to $3.36 billion. The company’s non-GAAP EPS increased 54.2% from its year-ago value to $2.96.
Analysts expect QCOM’s revenue for the fiscal 2022 fourth quarter (ending September 2022) to come in at $11.42 billion, representing 22.5% year-over-year growth. The $3.15 consensus EPS estimate for the ongoing quarter represents a 23.7% rise from the prior-year period. It’s no surprise that the company has surpassed the consensus revenue and EPS estimates in each of the trailing four quarters.
QCOM has gained 23.2% over the past month and 2.30% over the past year to close the last trading session at $150.21.
QCOM has an overall POWR Rating of B, which translates to a Buy in our proprietary rating system. It is also rated B for Quality. In the B-rated Semiconductor & Wireless Chip industry, it is ranked #31 of 94 stocks.
Beyond what we’ve stated above, we have also given QCOM grades for Growth, Momentum, Value, Stability, and Sentiment. Get all the QCOM ratings here.
Semtech Corporation (SMTC)
SMTC develops, manufactures, and sells analog and mixed-signal semiconductor products and advanced algorithms. SMTC operates through three segments: Signal Integrity, Wireless and Sensing, and Protection. The company provides solutions for various infrastructure, industrial, communication, medical, and consumer applications.
The company markets its offerings directly and internationally through independent distributors and sales representative firms.
Earlier this month, SMTC announced that it would acquire Sierra Wireless Inc. (SWIR) in an all-cash transaction valued at $1.2 billion, including debt. With the boost in domestic semiconductor manufacturing expected from the Biden administration, the timing of this deal couldn’t have been better. The company expects this deal to double its annual revenue roughly.
During the fiscal 2023 first quarter ended May 1, 2022, SMTC’s net sales increased 18.7% year-over-year to $202.15 million. Its gross profit grew 24.2%year-over-year to 130.25 million. The company’s non-GAAP net income attributable to common stockholders improved 48.8% year-over-year to $51.82 million, while its non-GAAP EPS increased 50.9% from the prior-year quarter to $0.80.
SMTC is expected to witness revenue growth of 12.6% year-over-year for fiscal 2023. Its EPS has surpassed Street estimates in each of the trailing four quarters and is estimated to increase 36.7% year-over-year in the current year. Over the past month, SMTC’s stock has gained 10.6% to close the last trading session at $55.74
SMTC’s strong fundamentals are reflected in its POWR Ratings. The stock has an overall rating of A, which equates to a Strong Buy in our POWR Ratings system. SMTC has an A grade for Quality and a B for Growth. Among the 94 stocks in the B-rated Semiconductor & Wireless Chip industry, it is ranked #3.
Click here to see the additional POWR Ratings for SMTC (Stability, Sentiment, Value, and Momentum).
AVGO shares were trading at $545.53 per share on Monday afternoon, down $5.91 (-1.07%). Year-to-date, AVGO has declined -16.78%, versus a -12.40% rise in the benchmark S&P 500 index during the same period.
About the Author: Mangeet Kaur Bouns
Mangeet’s keen interest in the stock market led her to become an investment researcher and financial journalist. Using her fundamental approach to analyzing stocks, Mangeet’s looks to help retail investors understand the underlying factors before making investment decisions. More...
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