Despite the short-term slump, the semiconductor industry’s long-term growth prospects remain optimistic. While semiconductor sales declined in the first quarter of 2023, sales grew by 0.3% in March 2023 compared to February 2023, the first month-over-month increase in a year, suggesting a recovery.

So, it could be wise to add quality chip stocks Broadcom Inc. (AVGO - Get Rating), Tower Semiconductor Ltd. (TSEM - Get Rating), and Photronics, Inc. (PLAB - Get Rating) to your portfolios.

The Biden-Harris Administration has announced the first CHIPS for America financing opportunity to revitalize the domestic semiconductor industry. The CHIPS and Science Act, a bipartisan Act, offers $39 billion in semiconductor incentives.

Secretary of Commerce, Gina M. Raimondo said, “The CHIPS and Science Act presents a historic opportunity to unleash the next generation of American innovation, protect our national security, and preserve our global economic competitiveness.”

Moreover, the artificial intelligence chip industry is predicted to reach $127.8 billion by 2028, with a 42.3% CAGR.

The global semiconductor market is expected to grow at a 13.1% CAGR until 2032. Investors’ interest in chip stocks is evident from the VanEck Vectors Semiconductor ETF’s (SMH) 23.7% returns over the past three months and 33.2% over the past six months.

Broadcom Inc. (AVGO - Get Rating)

AVGO designs, develops, and supplies various semiconductor devices focusing on complex digital and mixed signal complementary metal oxide semiconductor-based devices and analog III-V-based products worldwide. The company operates in two segments, Semiconductor Solutions, and Infrastructure Software.

AVGO’s forward non-GAAP P/E multiple of 19.68 is 8.2% lower than the industry average of 21.43. Its forward EV/EBIT multiple of 16.87 is 5.7% lower than the industry average of 17.89.

AVGO’s trailing-12-month ROCE of 54.45% is significantly higher than the industry average of 0.63%. Its trailing-12-month ROTA of 17.54% is significantly higher than the industry average of 0.08%.

AVGO’s non-GAAP net revenue for the fiscal first quarter ended January 29, 2023, increased 15.7% year-over-year to $8.92 billion. Its adjusted EBITDA increased 17.8% year-over-year to $5.68 billion.

Additionally, its non-GAAP net income increased 19.8% year-over-year to $4.48 billion. Its non-GAAP EPS came in at $10.33, representing a 23.1% increase from the year-ago period.

The consensus revenue estimate of $35.45 billion for the year ending October 2023 represents a 6.7% increase year-over-year. Its EPS is expected to grow 9.7% year-over-year to $41.29 for the same period. It surpassed EPS estimates in all four trailing quarters.

AVGO’s shares have gained 56% over the past nine months to close the last trading session at $812.73.

AVGO’s POWR Ratings reflect this promising outlook. The stock 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.

AVGO has an A grade for Momentum and Quality and a B for Sentiment. It is ranked #11 out of 91 stocks in the Semiconductor & Wireless Chip industry. Click here for the additional POWR Ratings for Growth, Stability, and Value for AVGO.

Tower Semiconductor Ltd. (TSEM - Get Rating)

Headquartered in Migdal Haemek, Israel, TSM is an independent semiconductor foundry that manufactures and markets analog-intensive mixed-signal semiconductor devices in the United States, Japan, other Asia countries, and Europe.

TSEM’s forward EV/EBITDA of 6.71x is 52.6% lower than the industry average of 14.15x. Its forward Price/Book multiple of 2.01 is 48% lower than the industry average of 3.86.

TSEM’s trailing-12-month ROCE of 15.52% is significantly higher than the industry average of 0.63%. Its trailing-12-month ROTA of 10.94% is significantly higher than the industry average of 0.08%.

In the first quarter that ended March 31, 2023, TSEM’s operating profit increased 41.8% year-over-year to $89.41 million. The company’s net income increased 32.1% year-over-year to $71.40 million, and EPS came in at $0.64, up 30.6% year-over-year.

Analysts expect TSEM’s revenue to increase 10.7% year-over-year to $1.61 billion in 2024. Its EPS is expected to grow 24.7% year-over-year to $2.48 in 2024. It surpassed EPS estimates in three of four trailing quarters. TSEM’s shares have gained 2.5% intraday to close its last trading session at $38.93.

It’s no surprise that TSEM has an overall B rating, equating to a Buy in our POWR Ratings system. It has an A grade for Momentum and a B for Stability, Sentiment, and Quality. It is ranked #12 in the same industry.

Beyond what is stated above, we’ve also rated TSEM for Growth and Value. Get all TSEM ratings here.

Photronics, Inc. (PLAB - Get Rating)

PLAB, along with its subsidiaries, manufactures and sells photomask products and services in the United States, Taiwan, China, Korea, Europe, and internationally.

PLAB’s forward EV/EBITDA multiple of 3.73 is 73.6% lower than the industry average of 14.15. Its forward EV/EBIT multiple of 4.78 is 73.3% lower than the industry average of 17.89.

PLAB’s trailing-12-month ROCE of 13.87% is significantly higher than the industry average of 0.63%. Its trailing-12-month ROTA of 8.42% is significantly higher than the industry average of 0.08%.

PLAB’s total revenue increased 12.1% year-over-year to $229.31 million in the fiscal second quarter that ended April 30, 2023. The company’s non-GAAP net income and non-GAAP EPS came in at $32.90 million and $0.54, up 42.4% and 42.1% year-over-year, respectively, in the same period.

Street expects PLAB’s revenue to increase 10.4% year-over-year to $909.90 million in October 2023. Its EPS is expected to increase 3.6% year-over-year to $0.65 for the same period. It surpassed EPS estimates in three of four trailing quarters. The stock has gained 49.7% over the past month to close the last trading session at $21.23.

PLAB’s strong fundamentals are reflected in its POWR Ratings. The stock has an overall rating of B, which equates to a Buy in our proprietary rating system.

It is ranked #6 in the same industry. It has an A grade for Value and Momentum and a B for Quality. To see additional PLAB’s rating for Sentiment, Stability, and Growth, click here.

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AVGO shares were trading at $874.88 per share on Tuesday morning, up $62.15 (+7.65%). Year-to-date, AVGO has gained 57.60%, versus a 10.72% rise in the benchmark S&P 500 index during the same period.

About the Author: Rashmi Kumari

Rashmi is passionate about capital markets, wealth management, and financial regulatory issues, which led her to pursue a career as an investment analyst. With a master's degree in commerce, she aspires to make complex financial matters understandable for individual investors and help them make appropriate investment decisions. More...

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