COVID-19 has impacted many traditional sectors like real estate, energy, and airlines. But technology is one of the few sectors that has thrived amid these challenging times. The tech sector’s ability to capitalize on the pandemic is evident from the Nasdaq’s 75% gain since hitting its low in March versus the S&P 500’s 53% return over this period.

Semiconductors are the backbone of computers. They are the chips that power your mobile, laptop, automotive dashboard, and even your home appliances. But rarely do people know about the companies that make these chips. However, the semiconductor industry has been one of the best-performers as its gains surpassed those of the technology sector.

The Fourth Technology Revolution and Semiconductors

Within tech, some of the fastest-growing areas are artificial intelligence, 5G, cloud computing, and the internet of things (IoT). This revolution is driving the need for powerful, energy-efficient semiconductors. World Semiconductor Trade Statistics (WSTS) expects the global semiconductor market to grow 3.3% this year and 6.2% next year, with memory chips leading the growth at 15% and 11%, respectively.

Some of the big names like Nvidia (NVDA) and Advanced Micro Devices (AMD) are trading near their all-time highs with a price-to-earnings ratio above 100 and are higher by many multiples over the past, few years.

Given the elevated valuations for many stocks in the industry, it’s a good idea to focus on some lesser-known stocks that have shown intriguing upside but are trading at affordable prices. Camtek Ltd. (CAMT), MagnaChip Semiconductor Corporation (MX), and AXT Inc. (AXTI) are four such stocks that should continue moving higher through the remainder of the year.

Camtek Ltd. (CAMT)

Founded in 1987, this Israel-based semiconductor testing equipment supplier is a small-cap stock, with a market capitalization of just $587.8 million. The lesser-known stock has surged 134% since its March sell-off, and 35% year-to-date on the back of strong orders from Taiwan and China.

CAMT manufactures and supplies metrology and inspection equipment to the semiconductor industry. Its equipment helps manufacturers identify defects at an early stage of production, improve yield, and reduce production cost. It competes with large players like KLA Corp (KLAC) and Applied Materials (AMAT). 

The growing semiconductor content in advanced technology, especially 5G smartphones, is driving demand for complex chips. This is creating the need for higher yield and, therefore, CAMT’s equipment. In August, it received a $7 million order from a tier-one RF device manufacturer.

CAMT stock fell more than 45% in March as the COVID-19 pandemic delayed the installation of its equipment. As the lockdown eased, the company realized $3 million in revenue from these delayed installations in the second quarter. Its second-quarter revenue surged 8% year-over-year to $37 million. Its non-GAAP EPS fell 11% to $0.16 but surpassed the street’s estimate by 6.7%. In the past 12 months, CAMT’s revenue increased by 35%, beating 86.5% of the US stocks in the StockNews.com universe.

CAMT’s strong fundamentals are reflected in its POWR Ratings. It has a “Buy” rating with an “A” in Trade Grade and Industry Rank. Within the Semiconductor & Wireless Chip industry, it’s ranked #30 out of 86 stocks.

MagnaChip Semiconductor Corporation (MX)

Founded in 2004, South Korea-based analog and mixed-signal semiconductor manufacturer MagnaChip Semiconductor Corporation has a market cap of $459 million. The stock has surged 85% from its March low, and 10% year-to-date with the company undergoing a major restructuring to boost its profitability. 

MX manufactures power management and display solutions for consumer, computing, communication, industrial, automotive, and IoT applications. It is a leader in the global OLED Smartphone display driver integrated circuit (DDIC) non-captive market, with a 33.2% market share, according to OMDIA. The growing demand for longer battery life and high definition displays in mobile, television, and laptops is driving demand for MX’s products. 

As part of the restructuring, MX exited the non-auto LCD DDIC product line in the second quarter. It also sold its Foundry business to Magnus Semiconductors’ subsidiary for about $350.6 million on September 1st. It will use the sales proceeds to offload debt and focus on its display and power business. The Foundry sale will significantly reduce the company’s size as the business contributed 39% toward the company’s revenue. 

After excluding the discontinued operations, MX’s second-quarter revenue stood at $118 million and non-GAAP EPS at $0.13. The restructuring has improved its capital turnover to 108.34, which is better than 99.7% of US stocks in our coverage.

MX’s POWR Ratings reflect this promising outlook. It has an overall rating of “Buy” with a “B” for Trade Grade and Peer Grade and an “A” for Industry Rank. Among the 86 stocks in the Semiconductor & Wireless Chip industry, it’s ranked #31.

AXT Inc. (AXTI)

Founded in 1986, the US-based material science company AXT has a market capitalization of $210.72 million. It develops and manufactures raw materials for semiconductor companies. Silicon substrate is the major raw material for semiconductors, but it has performance limitations. That is where AXTI’s high-performance compound and single element semiconductor substrate wafers come into the picture.

AXTI’s customers use its indium phosphide (InP), gallium arsenide (GaAs), and germanium (Ge) substrate wafers to fabricate integrated circuits used in fiber-optic communications, wireless communications, and lighting display. The company has its manufacturing facilities in China.

Last year was challenging for AXTI as weak demand impacted its GaAs and Ge customers. Its revenue fell 18.7% year-over-year to $83.25 million. Moreover, its exposure to China became a risk rather than an advantage because of the US-China trade war. It relocated its factory. All of this increased its cost, thereby resulting in a net loss of $2.6 million in 2019. AXTI stock rose just 3.5% last year. 

In the second-quarter earnings call, AXTI CEO Morris Young said, “We view 2020 as a turning point in our business.” He added that the rising trend of 5G, data centers, and passive optical networks (PON) will drive growth for high-performance chips. This will drive demand for AXTI’s substrate wafers. The company is currently working on several qualifications, which will create significant revenue opportunities in the fourth quarter and next year. 

AXTI stock has surged 170% from its March low, and 16% year-to-date. Its POWR Ratings reflect this promising outlook. It has an overall rating of “Buy” with an “A” for Trade Grade, Peer Grade, and Industry Rank. Among the 86 stocks in the Semiconductor & Wireless Chip group, it’s ranked #33.

Investor takeaway 

For less than $20 a share, AXTI, CAMT, and MX will give you exposure to the complete semiconductor supply chain from raw materials to testing equipment to chip manufacturing. There are some short-term hiccups, but the stocks are well-positioned to ride the 5G, data center, and IoT revolution in the long term.

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CAMT shares were trading at $14.51 per share on Tuesday afternoon, down $0.67 (-4.41%). Year-to-date, CAMT has gained 33.98%, versus a 4.61% rise in the benchmark S&P 500 index during the same period.

About the Author: Puja Tayal

Puja is a seasoned writer working with financial publishing companies like Motley Fool Canada and Market Realist. With over 13 years of experience in the field of fundamental research, she brings a blend of comprehensive, well-researched insights into her articles. More...

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