The global chip shortage, which had impacted various downstream businesses since the beginning of the year, made way for a demand crisis with manufacturers having to deal with excess inventory. Moreover, aggressive interest rate hikes by the central banks worldwide to control inflation threaten further pullback in demand.
Despite various headwinds and uncertainties, the extensive and increasing use of semiconductor chips in electronics, critical infrastructure, electric vehicles, and other industries remains immutable in our rapidly digitizing modern economy.
According to a report by Fortune Business Insights, the global semiconductor market is expected to grow from $573.44 billion in 2022 to $1.38 trillion in 2029, registering a 12.2% CAGR. The legislative support in the form of the CHIPS and Science Act is expected to strengthen manufacturing capabilities and supply chains.
Thus, it could be wise to buy fundamentally strong semiconductor stocks Broadcom Inc. (AVGO), QUALCOMM Incorporated (QCOM), and Rambus, Inc. (RMBS). However, it could be wise to avoid fundamentally weak semiconductor stocks NVIDIA Corporation (NVDA) and Advanced Micro Devices, Inc. (AMD), which are struggling with competitive pressures and other headwinds.
Stocks to Buy:
Broadcom Inc. (AVGO)
AVGO develops and supplies various semiconductor devices worldwide. The company operates in two segments: Semiconductor Solutions; and Infrastructure Software.
AVGO’s 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 September 6, AVGO announced the delivery of its Trident 4C Ethernet switch ASIC, 12.8 terabits/second security switch. This product is capable of analyzing all traffic at line rate and detecting flow anomalies in real-time without the need to compromise between performance and security. The company expects the product to help its customers evolve their networks cost-effectively.
On August 22, AVGO and Tencent Holdings Ltd. (TCEHY) announced a strategic partnership to accelerate the adoption of high bandwidth co-packaged optics (CPO) network switches for cloud infrastructure. This collaboration is expected to help AVGO extend its market leadership.
In May, AVGO announced an agreement with VMWare (VMW) to acquire all the outstanding shares of VMW for approximately $61 billion in cash and stock. The acquisition advances AVGO’s strategy to build the world’s leading infrastructure technology company. Through this acquisition, the company aims to add approximately $8.5 billion of pro forma EBITDA within three years.
For the fiscal 2022 third quarter ended July 31, 2022, AVGO’s net revenues increased 24.9% year-over-year to $8.46 billion. During the same period, the company’s non-GAAP operating income and non-GAAP EBITDA increased 31.8% and 30.4% year-over-year to $5.20 billion and $5.38 billion, respectively.
As a result, the non-GAAP net income for the quarter came in at $4.24 billion, up 35.8% from the previous-year quarter. Also, its non-GAAP EPS came in at $9.73, up 39.8% year-over-year.
For the fiscal year 2022, analysts expect AVGO’s revenue and EPS to increase 20.8% and 33.5% year-over-year to $33.17 billion and $37.40, respectively. The company is on an impressive feat of surpassing EPS estimates in each of the trailing four quarters.
Over the past year, the stock has dipped 7.9% to close the last trading session at $464.75.
AVGO’s strong fundamentals are reflected in its POWR Ratings. The stock’s overall B rating translates to a Buy in our proprietary rating system. The POWR Ratings assess stocks by 118 different factors, each with its own weighting.
AVGO also has an A grade for Quality and a B for Growth and Sentiment. In the B-rated Semiconductor & Wireless Chip industry, it is ranked #5 out of 92 stocks.
Click here for the additional POWR Ratings for Value, Momentum, and Stability for AVGO.
QUALCOMM Incorporated (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).
On September 22, QCOM announced that its automotive design-win pipeline has grown to $30 billion, driven by increased adoption of its Snapdragon® Digital Chassis™ solutions, making the company the auto industry’s partner of choice for the next-generation vehicles.
In July, QCOM expanded its strategic partnership with Samsung Electronics Co., Ltd. through 2030 for 3G, 4G, 5G, and upcoming 6G mobile technology.
Cristiano Amon, QCOM’s president and chief executive officer, said, “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 stability and growth to QCOM’s earnings in the years ahead.
In the fiscal 2022 third quarter ended June 26, QCOM’s net revenues increased 35.7% year-over-year to $10.94 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 fourth quarter of the fiscal (ending September 2022) to come in at $11.39 billion, indicating 21.9% year-over-year growth. The $3.16 consensus EPS estimate for the ongoing quarter represents a 23.8% rise from the prior-year period. Furthermore, the company has surpassed the consensus revenue and EPS estimates in each of the trailing four quarters.
QCOM has declined 9.8% over the past year to close the last trading session at $120.34.
QCOM’s stable outlook earned it an overall POWR Rating of B, which translates to a Buy in our proprietary rating system. The stock also has a grade of B for Value and Quality.
In the B-rated Semiconductor & Wireless Chip industry, it is ranked #28 of 92 stocks.
Beyond what we’ve stated above, we have also given QCOM grades for Growth, Momentum, Stability, and Sentiment. Get all QCOM ratings here.
Rambus, Inc. (RMBS)
RMBS provides semiconductor products in the United States, Taiwan, South Korea, Japan, Europe, Canada, Singapore, China, and internationally through direct sales and distributors. The company offers DDR memory interface chips, silicon IP, physical interface, and digital controller IP.
This month, RMBS announced an accelerated share repurchase program to repurchase an aggregate of approximately $100 million of its common stock, with an initial delivery of about 3.1 million shares. This demonstrates the management’s confidence in the company’s future growth and its ability to keep delivering long-term value to shareholders.
On July 18, RMBS announced the expansion of its DDR5 memory interface chip portfolio with the addition of the Rambus SPD (Serial Presence Detect) Hub and Temperature Sensor.
Furthermore, on May 24, RMBS completed the acquisition of Hardent, Inc., a leading SoC digital design company. Luc Seraphin, RMBS’ President and CEO said, “Hardent’s advanced SoC design experience amplifies our CXL development efforts. We are very pleased to welcome our new colleagues to the Rambus team.”
For the fiscal 2022 second quarter ended June 30, 2022, RMBS reported revenue of $121.13 million, up 42.7% year-over-year. The company’s operating income increased 152.2% over the previous-year quarter to $35.56 million. During the same period, its net income came in at $35.02 million, up 213.6% year-over-year. This translated to a quarterly EPS of $0.31, up 210% year-over-year.
Analysts expect RMBS’ revenue to increase 22.3% year-over-year to $553.84 million in the current year. Also, the company’s revenue and EPS for the next year are expected to grow 6.1% and 7,866.7% from the previous year to $587.41 million and $0.80, respectively.
Over the past year, the stock has gained 10.4% to close the last trading session at $25.44.
RMBS has an overall rating of B, equating to a Buy, in our POWR Ratings system. It has an A grade for Growth and grade B for Sentiment and Quality. It is ranked #13 in the same industry.
We’ve also rated RMBS for Momentum, Value, and Stability. Get all RMBS ratings here.
Stocks to Sell:
NVIDIA Corporation (NVDA)
NVDA is the global provider of graphics, computation, and networking solutions. The company operates through two segments: Graphics and Compute & Networking.
This week, Intel Corporation (INTC) signaled its intention to challenge NVDA on its turf by releasing a graphics card for gamers that is slated to be available on Oct. 12, to re-enter the market for video gaming graphics chips. This development is expected to increase the competition for NVDA and keep margins under pressure.
At the beginning of this month, the White House blocked NVDA from exporting high-end graphics chips to China. This action was driven by security concerns arising from China’s possible military use of the technology. The company said the ban impacted $400m in potential sales to China.
For the second quarter of fiscal 2023 ended July 31, 2022, NVDA’s non-GAAP gross profit decreased 29.1% year-over-year to $3.07 billion, while non-GAAP operating income came in at $1.33 billion, indicating a 56.9% decline from the previous-year quarter.
In addition, NVDA’s non-GAAP net income for the quarter declined 50.7% year-over-year to $1.29 billion. This led to the company reporting non-GAAP earnings per share of $0.51 for the quarter, registering a 51% decline over the previous-year period.
Analysts estimate NVDA’s EPS and revenue for the fiscal 2023 third quarter (ending October 2022) to come in at $0.71 and $5.87 billion, indicating 39.3% and 17.3% year-over-year declines, respectively.
The stock has plummeted 58.8% year-to-date to close the last trading session at $124.13.
NVDA’s bleak outlook is also reflected in its overall POWR Ratings of D, equating to a Sell. NVDA also has a D grade for Growth, Value, and Stability.
NVDA is ranked #77 out of 92 stocks in the same industry. Click here to access the additional POWR Ratings for NVDA (Momentum, Sentiment, and Quality).
Advanced Micro Devices, Inc. (AMD)
AMD operates as a global semiconductor company. The company’s two segments are computing and Graphics; and Enterprise, Embedded, and Semi-Custom. It serves original equipment manufacturers (OEMs), public cloud service providers, original design manufacturers, system integrators, independent distributors, online retailers, and add-in-board manufacturers.
Yesterday, AMD’s arch-rival, Intel Corporation (INTC), launched its 13th generation core processors, designed to put INTC in performance lead over AMD. INTC may corner a greater share of the desktop performance market amid a slump in PC sales following massive growth during the early days of the pandemic.
On August 31, AMD disclosed instructions from U.S. Officials to stop exporting its top artificial intelligence chip to China. This prohibition may potentially impact its sales in China.
AMD’s operating expenses increased 150.8% year-over-year to $2.51 billion for the fiscal 2022 second quarter ended June 25, 2022. Its operating income was $526 million, down 36.7% year-over-year. Also, its net income came in at $447 million, down 37% year-over-year, while its EPS decreased 53.4% year-over-year to $0.27 during the same period.
As of June 25, 2022, AMD’s long-term debt stood at $2.47 billion, compared to $1 million as of December 31, 2021. A significant increase in expenses incurred by the company for servicing this debt is expected due to rising interest rates.
AMD’s stock has plunged 25.5% over the past month and 55.3% year-to-date to close the last trading session at $67.17.
AMD’s POWR Ratings reflect its poor prospects. It has an overall grade of D, which indicates a Sell in our proprietary rating system. Also, the stock has a D grade for Stability.
AMD is ranked #84 out of 92 stocks in the Semiconductor & Wireless Chip industry.
Click here to access the additional POWR Ratings for AMD (Growth, Value, Momentum, Sentiment, and Quality).
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NVDA shares were trading at $126.79 per share on Wednesday afternoon, up $2.66 (+2.14%). Year-to-date, NVDA has declined -56.86%, versus a -21.26% rise in the benchmark S&P 500 index during the same period.
About the Author: Santanu Roy
Having been fascinated by the traditional and evolving factors that affect investment decisions, Santanu decided to pursue a career as an investment analyst. Prior to his switch to investment research, he was a process associate at Cognizant. With a master's degree in business administration and a fundamental approach to analyzing businesses, he aims to help retail investors identify the best long-term investment opportunities. More...
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