Based in Chunan, Taiwan, SemiLEDs Corporation. (LEDS) is a manufacturer and seller of light emitting diode (LED) chips, LED components, and LED modules. The stock has gained 305.5% over the past year and 79.4% over the past month as exponential growth in demand for semiconductors from several industries and limited supply continue to propel  companies in this space.

However, the stock is currently trading at $8.70, 35.3% below its $13.44 52-week high.

In its last-reported quarter, the company has generated substantial losses and a negative profit margin. And its its high valuation is not justified by its current and expected financials. Indeed, while its peers are benefiting from the industry tailwinds, LEDS is struggling to stay afloat.

Click here to checkout our Semiconductor Industry Report for 2021

Here is what we think could influence LEDS’ performance in the near-term:

Competitive Landscape Can Be a Headwind

With several Chinese key players entering the semiconductor market to capitalize on the rising global demand for semiconductor chips, the industry has become highly competitive. Dominant players like Samsung Electronics and Taiwan Semiconductor Manufacturing Co. Ltd. (TSM) control more than 70% of the semiconductor manufacturing market. As these players continue to expand their business footprint across emerging economies by investing heavily in leading-edge manufacturing technologies, relatively smaller companies like LEDS may find it difficult to survive.

Disappointing Financials

LEDS’ loss from operations came in at $507,000 in its  fiscal second quarter, ended February 28. The company reported a $255,000 net loss , while its loss per share came in at $0.06 over this period.  LEDS’ operating margin for the second quarter was negative 42%, compared with negative 135% in the first quarter of fiscal 2021.

The company’s revenue and total assets declined at CAGRs of 15.9% and 2.4%, respectively, over the past three years. Also, its tangible book value declined at a 38.7%  annualized rate  over the same period.

Low Profitability

LEDS’ 15.2% trailing-12-month gross profit margin is 68.7% lower than the 48.5% industry average. Furthermore, the company’s trailing-12-month cash from operations is negative $1.43 million. Also, its 0.3% asset turnover ratio is 48.3% lower than the 0.6% industry average of 0.6%. LEDS’ ROE, ROA, and ROTC are negative 76.8%, 10.1% and 19.8%, respectively.

Stretched Valuation

In terms of trailing-12-month EV/Sales, LEDS’ 8.11x is 82.9% higher than the industry average of 4.43x. Also, in terms of trailing-12-month P/S ratio, the stock’s 7.34x is 68.4% higher than the 4.36x industry average. Its 22.25x trailing-12-month price-to-book ratio is much higher than the5.14x  industry average.

Unfavorable POWR Ratings

LEDS has an overall rating of D, which translates to Sell in our POWR Ratings system. The POWR Ratings are calculated by considering 118 different factors with each factor weighted to an optimal degree.

Our proprietary rating system also evaluates each stock based on eight different categories. LEDS has an F Quality Grade, given the stock’s weak profitability.

In terms of Value Grade, the company has a C, which is in sync with its stretched valuation.

Also, it has a D grade for Growth, which is consistent with the stock’s inadequate financials.

Click here to see the additional POWR Ratings for LEDS (Stability, Sentiment and Momentum).

The stock is ranked #87 of 98 stocks in the B-rated Semiconductor & Wireless Chip industry.

There are several top-rated stocks in the same industry. Click here to view them.

Bottom Line

Although the global semiconductor shortage has been a boon for LEDS so far, it is not able to capitalize on the industry tailwinds for long. While its peers are expanding their businesses and generating substantial profits, LEDS  is still far from profitability. In addition to that, its premium valuation is out of  sync with its growth prospects. So, we think it could be wise to avoid the stock now.

Click here to checkout our Semiconductor Industry Report for 2021

LEDS shares were trading at $8.21 per share on Tuesday morning, down $0.49 (-5.63%). Year-to-date, LEDS has gained 129.33%, versus a 10.76% rise in the benchmark S&P 500 index during the same period.

About the Author: Imon Ghosh

Imon is an investment analyst and journalist with an enthusiasm for financial research and writing. She began her career at Kantar IMRB, a leading market research and consumer consulting organization. More...

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