The extensive usage of chips across various industries and the growing adoption of emerging technologies across enterprises are expected to drive the demand for semiconductors. In addition, lucrative government incentives and investments would boost the industry’s prospects.

Amid this, popular chipmaker Micron Technology Inc. (MU) is forecasting broader losses. However, considering the industry’s tailwinds, it could be wise to invest in fundamentally strong chip stocks like Cohu, Inc. (COHU), Taiwan Semiconductor Manufacturing Company Limited (TSM), and Nikon Corporation (NINOY).

Recently, MU forecasted a wider-than-expected first-quarter loss, with an adjusted loss per share expectation of $1.07, higher than the analyst estimates of a 95 cents per share loss for the quarter.

Moreover, MU’s profitability metrics show dim prospects as its trailing-12-month gross profit margin of negative 9.11% and EBIT margin of negative 35.87% compare to the industry averages of 49.10% and 4.66%. Its trailing-12-month net income margin of negative 37.54% compares to the industry average of 2.03%.

Despite a challenging macroeconomic environment, the semiconductor industry is poised for tremendous growth and expansion in the long term. The Semiconductor Industry Association (SIA) stated that global chip sales totaled $43.2 billion in July 2023, indicating an increase of 2.3% compared to June 2023 but 11.8% less year-over-year.

According to Statista, revenue in the consumer electronics market would amount to $1.03 trillion in 2023 and is expected to grow at a CAGR of 2.3% in the forecast period 2023-2028. Such a spending splurge on electronics, especially among developing economies, should generate a huge demand for advanced chips and processors in the coming years.

Further, favorable government policies and spending should also boost the industry’s prospects. For instance, President Biden enacted the CHIPS and Science Act, allocating around $53 billion toward enhancing U.S. semiconductor manufacturing, research, and workforce.

Since implementing the CHIPS law one year ago, businesses have announced more than $166 billion for semiconductor and electronics manufacturing. Furthermore, according to a report by Mordor Intelligence, the semiconductor industry is projected to reach $1.09 trillion by 2028, growing at a CAGR of 10.9%.

Let’s delve deeper into the fundamentals of these Semiconductor & Wireless Chip stocks, starting with the third stock.

Stock #3: Cohu, Inc. (COHU)

COHU provides semiconductor test equipment and services internationally. The company supplies semiconductor test and inspection handlers, micro-electromechanical system (MEMS) test modules, test contactors, thermal sub-systems, and semiconductor automated test equipment for semiconductor manufacturers and test subcontractors.

On October 2, COHU announced its acquisition of Equiptest Engineering Pte. Ltd. (EQT), a semiconductor test contactors and other consumables provider. The acquisition is expected to accrue to the company’s fiscal year 2024 result.

COHU’s trailing-12-month EBIT margin of 13.10% is 181.3% higher than the 4.66% industry average. Its trailing-12-month net income margin of 9.75% is 379.6% higher than the 2.03% industry average. Likewise, the stock’s trailing-12-month ROCE of 7.88% is 555.1% higher than the industry average of 1.20%.

For the fiscal second quarter, which ended on July 1, 2023, COHU’s net sales amounted to $168.92 million, while its non-GAAP income from operations stood at $29.91 million.

During the same period, the company’s non-GAAP net income came in at $22.84 million and $0.48 per share. Moreover, its total current liabilities amounted to $138.40 million as of July 1, 2023, down 14% compared to $160.87 million as of December 31, 2022.

Analysts expect COHU’s revenue and EPS for the fiscal year 2024 (ending December 2024) to increase 12.5% and 42.3% from the prior year to $736.69 million and $2.47, respectively. Additionally, it surpassed the consensus EPS estimates in each of the trailing four quarters, which is impressive.

Over the past year, the stock has gained 19.7% to close the last trading session at $34.70. It is up 8.3% year-to-date.

COHU’s POWR Ratings reflect its solid prospects. The stock has an overall B rating, which translates to Buy in our proprietary rating system. The POWR Ratings assess stocks by 118 different factors, each with its own weighting.

It has an A grade for Momentum and a B for Value and Sentiment. In the 90-stock Semiconductor & Wireless Chip industry, it is ranked #19. To see additional ratings of COHU for Growth, Stability, and Quality, click here.

Stock #2: Taiwan Semiconductor Manufacturing Company Limited (TSM)

TSM, headquartered in Hsinchu City, Taiwan, manufactures, packages, and sells integrated circuits and other semiconductor devices internationally. The company offers complementary metal oxide silicon wafer fabrication processes to manufacture logic, mixed-signal, radio frequency, and embedded memory semiconductors.

On August 8, TSM, Robert Bosch GmbH, Infineon Technologies AG, and NXP Semiconductors N.V. announced a collaborative investment in the European Semiconductor Manufacturing Company (ESMC) in Dresden, Germany, to provide advanced semiconductor manufacturing services.

The newly established company aims to establish a 300mm semiconductor fab facility with a monthly production capacity of 40,000 300mm wafers.  TSM is expected to hold a 70% stake in this joint venture, while Bosch, Infineon, and NXP would have 10% each. Such strategic partnerships would aid TSM’s entry into newer markets, driving its growth.

TSM’s trailing-12-month EBIT margin of 47.96% is 929.5% higher than the 4.66% industry average, while its trailing-12-month net income margin and ROE of 43.33% and 33.97% compare to the respective industry averages of 2.03% and 1.20%.

For the second quarter that ended June 30, 2023, TSM reported net revenue and net income of $15.68 billion and $5.93 billion, respectively. Also, its total assets grew 18.5% from the prior-year quarter to $165.42 billion as of June 30, 2023.

The consensus revenue estimate of $79.26 billion for the next fiscal year (ending December 2024) represents a 21.3% increase year-over-year. The consensus EPS estimate of $6.05 for the same period indicates a 23.1% improvement year-over-year. In addition, the company surpassed the consensus EPS estimates in all four trailing quarters.

Over the past year, the stock has gained 16.9% to close the last trading session at $87.03. It has gained 16.8% year-to-date.

TSM’s POWR Ratings reflect this promising outlook. It has an overall rating of B, which translates to Buy according to our proprietary rating system.

TSM has an A grade for Momentum and a B for Quality. Out of the 90 stocks in the same industry, it is ranked #18.

To see the other ratings of TSM for Growth, Value, Stability, and Sentiment, click here.

Stock #1: Nikon Corporation (NINOY)

NINOY, headquartered in Minato, Japan, is a global manufacturer and distributor of optical instruments. It operates through the Imaging Products Business; Precision Equipment Business; Healthcare Business; Components Business; and Industrial equipment and Others segments.

On September 27, NINOY announced the release of the NIKKOR Z 135mm f/1.8 S Plena, a mid-telephoto prime lens compatible with full-frame/FX-format mirrorless cameras. In addition, the company released the full-frame/FX-format Nikon Z f mirrorless camera in the same month. These new products are expected to substantially add to NINOY’s revenue stream.

NINOY’s trailing-12-month gross profit margin and net income margin of 45.08% and 5.57% are 27.3% and 26.6% higher than the industry averages of 35.41% and 4.40%, respectively.

For the first quarter that ended June 30, 2023, NINOY’s revenue and total comprehensive income for the period came in at ¥158.15 billion ($1.06 billion) and ¥33.89 billion ($227.98 million), up 8.6% and 7.6% year-over-year, respectively. The company’s total current assets stood at ¥646.15 billion ($4.35 billion) as of June 30, 2023, compared to ¥617.88 billion ($4.16 billion) as of March 31, 2023.

Street expects NINOY’s revenue for the second quarter (ended September 2023) to grow 11.3% year-over-year to $1.12 billion. Similarly, the consensus revenue estimate of $4.36 billion for the current fiscal year (ending March 2024) represents a 42.6% increase year-over-year.

The stock has gained 15.3% year-to-date to close the last trading session at $10.19. It is up 6.5% over the past year.

NINOY’s POWR Ratings reflect its robust prospects. The stock has an overall grade of B, translating to Buy in our proprietary rating system.

NINOY has a B grade for Value, Stability, and Quality. It is ranked #11 within the same industry.

To see the other ratings of NINOY for Growth, Momentum, and Sentiment, click here.

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TSM shares were trading at $89.46 per share on Friday afternoon, up $2.43 (+2.79%). Year-to-date, TSM has gained 21.48%, versus a 13.32% rise in the benchmark S&P 500 index during the same period.

About the Author: Anushka Dutta

Anushka is an analyst whose interest in understanding the impact of broader economic changes on financial markets motivated her to pursue a career in investment research. More...

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