After a prolonged shortage of semiconductor chips, which has created supply chain disruptions across several tech-dependent industries, studies show front-end manufacturing has finally started to meet demand. However, deficiencies in back-end manufacturing and materials persist. But capacity additions facilitated by hefty investments by governments and industry giants are expected to ease the chip shortage by year’s end.
According to the International Data Corporation (IDC), the industry should stabilize by the middle of 2022, with the potential for overcapacity in 2023 because larger-scale capacity expansions are expected to begin toward the end of 2022. Furthermore, IDC expects the semiconductor market to grow by 17.3% in 2021, versus 10.8% in 2020.
Because the industry is making a comeback, we think prominent industry players STMicroelectronics N.V. (STM) and United Microelectronics Corporation (UMC) should be quality additions to one’s portfolio now.
STMicroelectronics N.V. (STM)
STM, which is headquartered in Geneva, designs, develops, manufactures, and markets semiconductor products in Europe, the Middle East, Africa, the Americas, and the Asia Pacific. The company operates through its Automotive and Discrete Group; Analog, MEMS and Sensors Group; and Microcontrollers and Digital ICs Group segments.
In October, STM and Sierra Wireless, a world-leading IoT services provider, agreed to enable the STM32 microcontroller (MCU) user community to leverage flexible cellular IoT connectivity and edge-to-cloud solutions from Sierra Wireless. The collaboration should allow STM to provide a complete end-to-end solution for connected IoT and position the company for continued growth.
Earlier in the same month, STM collaborated with Rosenberger, a leading manufacturer of impedance-controlled and optical connectivity solutions, to introduce a contactless connector for ultra-reliable, short-range, point-to-point full-duplex data exchanges in industrial and medical applications. Rosenberger’s expertise in interconnects should support STM’s growth in the wireless technology space.
STM’s net revenue increased 19.9% year-over-year to $3.20 billion in its fiscal third quarter, ended October 2. Its operating income stood at $605 million, up 84% from the same period last year. Its net income grew 95.6% from its year-ago value to $474 million. And the company’s EPS has increased 96.2% year-over-year to $0.51.
A $3.41 billion consensus revenue estimate for its fiscal fourth-quarter, ending December 2021 indicates a 5.3% improvement from the same period last year. Analysts expect the company’s EPS to come in at $0.65 in the current quarter, reflecting a 3.2% rise year-over-year. Furthermore, STM surpassed the Street’s EPS estimates in three of the trailing four quarters.
STM has gained 36.1% in price year-to-date. Over the past month, the stock has gained 20.8% to close yesterday’s trading session at $50.52.
STM’s strong fundamentals are reflected in its POWR Ratings. STM has an overall A rating, which equates to Strong Buy in our proprietary POWR Ratings system. The POWR Ratings are calculated considering 118 distinct factors, with each factor weighted to an optimal degree.
STM has a B grade for Sentiment, Growth, Value, Momentum, and Quality. Among the 101 stocks in the B-rated Semiconductor & Wireless Chip industry, STM is ranked #2.
Beyond what we have stated above, we have also rated STM for Stability. Click here to view all STM ratings.
United Microelectronics Corporation (UMC)
Based in Taiwan, UMC is a leading global semiconductor foundry company that provides circuit design, mask tooling, wafer fabrication, and assembly and testing services. The company operates through two segments–Wafer Fabrication and New Business.
UMC plans to build a low carbon supply chain and is aiming for a 20% reduction in carbon emissions and an increase in renewable energy usage to 20% of total power consumption by 2030. This aligns with its commitment to achieving net-zero carbon emissions by 2050, making it the first semiconductor foundry to do so.
In September, UMC and Chipbond Technology Corporation agreed to a share exchange resolution to establish a long-term strategic partnership. The companies plan to collaborate in driver ICs, integrate front-end and back-end process technologies, and develop driver IC solutions of higher frequency and lower power consumption to jointly provide a complete solution for customers. This initiative should help UMC to expand its operating scale and promote diversification.
UMC’s operating revenues increased 24.6% year-over-year to NT$55.91 billion ($2.00 billion) in its fiscal third quarter, ended on September 30. Its operating income grew 112.2% from its year-ago value to NT$15.14 billion ($544 million). Its net income attributable to the parent’s shareholders came in at NT$17.46 billion ($627 million), up 91.7% from the same period last year. The company’s earnings per ADS increased 90.4% year-over-year to $0.26.
Analysts expect UMC’s revenues to increase 30.9% year-over-year to $2.08 billion in the current quarter. The $0.21consensus EPS estimate for the current quarter indicates a 31.2% rise from the prior-year quarter. The company has an impressive earnings surprise history; it has beaten the consensus EPS estimates in each of the trailing four quarters.
Shares of UMC have gained 92.8% in price over the past year and 27.6% year-to-date to close yesterday’s trading session at $10.76.
It is no surprise that UMC has an overall A grade, which equates to a Strong Buy rating in our proprietary POWR Ratings system. UMC also has an A grade for Sentiment, and a B for Value, Momentum, and Quality. It is ranked #5 in the Semiconductor & Wireless Chip industry.
Click here to view additional UMC ratings for Growth and Stability.
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STM shares were trading at $50.67 per share on Friday afternoon, up $0.15 (+0.30%). Year-to-date, STM has gained 36.98%, versus a 26.72% rise in the benchmark S&P 500 index during the same period.
About the Author: Subhasree Kar
Subhasree’s keen interest in financial instruments led her to pursue a career as an investment analyst. After earning a Master’s degree in Economics, she gained knowledge of equity research and portfolio management at Finlatics. More...
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