The semiconductor industry has captivated the attention of investors throughout 2023, largely due to the growing excitement around the expanding role of artificial intelligence (AI), which heavily relies on specialized chips for its high-performance computations. Beyond the AI buzz, semiconductors have become essential components in a wide array of devices, from smartphones to automobiles. The surge in demand for vehicles has notably contributed to the persistent semiconductor shortage observed in recent times.
However, the upward trajectory of semiconductor stocks encountered a hurdle this month. After achieving a remarkable 54% surge during the initial seven months of the year, the iShares Semiconductor ETF (SOXX), tracking the top 30 semiconductor firms in the U.S., experienced a 10.5% decline in August. Despite this, SOXX maintains a YTD increase of 38%, outpacing the Nasdaq Composite’s 28% rise over the same period.
The days ahead may introduce more volatility for semiconductor stocks, particularly with the upcoming quarterly results from Nvidia (NASDAQ:NVDA) on August 23. Nevertheless, the demand for semiconductors remains steadfast, and the recent market retreat might unveil opportunities to invest in quality chip stocks at more affordable prices. Let’s look at 3 chip companies to look out for.
ON Semiconductor
ON Semiconductor (NASDAQ:ON) has evolved significantly. The company, now valued at $39.78 billion, is under the ownership of Belgian foundry BelGaN Group BV. ON Semiconductor chips serve a diverse range of applications, including smartphones, vehicles, industrial machinery, medical devices, laptops, and tablets.
Despite a 15.9% retracement in August, Onsemi’s shares have surged by 45.2% year-to-date. The company delivered robust Q2 results, surpassing revenue and earnings expectations, albeit with marginal YoY changes. Q2 revenues held steady at $2.1 billion, while EPS matched the previous year’s figure at $1.33.
Onsemi has bolstered its financial position by reducing long-term debt from approximately $3 billion at the beginning of the year to around $2.5 billion. However, operational cash generation dipped from $420.8 million to $390.8 million for the April-June period, with a concerning free cash outflow of $39.8 million compared to the prior year’s inflow of $202.7 million.
The company has strategically positioned itself to benefit from the escalating demand for Silicon Carbide (SiC), especially in the electric vehicle (EV) and renewable energy sectors.
Analysts predict ON to witness a 2.27% earnings growth in the next quarter, although the full-year earnings are projected to decrease by 2.63% in FY23. The stock retains a cautiously optimistic outlook, with an average target price of $118.23, reflecting a potential 30% upside from current levels. Among 26 analysts covering the stock, 17 recommend a “Strong Buy,” one suggests a “Moderate Buy,” and eight advocate a “Hold.”
NXP Semiconductors NV
Dutch semiconductor company, NXP (NASDAQ:NXPI) has gained prominence. The company, boasting a $50.72B market capitalization, delivers semiconductor solutions across automotive, industrial, IoT, mobile, and communication infrastructure sectors.
Mirroring the broader semiconductor trend, NXP declined by 12.6% in August while still maintaining a year-to-date gain of 24.7%. The company’s recent quarterly results were commendable, despite flat YoY revenue figures. Q2 revenues stood at $3.3 billion, and EPS reached $3.43 – a 2.6% YoY decrease but exceeding the consensus estimate of $3.28. Notably, NXP has consistently outperformed analysts’ expectations over the past five quarters.
The drop in revenue was influenced by a 19% annual decrease in the Industrial & IoT segment, contrasting with a 9% growth in the automotive business, which contributes significantly to NXP’s revenue. NXP’s collaboration with smart EV player Nio (NIO) to integrate its automotive radar technology further bolsters its position in the automotive sector.
While earnings estimates are not overwhelmingly positive, with anticipated declines of 7.9% and 13.5% for the current quarter and FY23 respectively, the stock maintains a cautiously optimistic outlook. Among 23 analysts covering NXP, nine recommend a “Strong Buy,” two propose a “Moderate Buy,” and 12 suggest a “Hold.” The mean target price of $232.73 implies an anticipated 19% upside from current levels.
STMicroelectronics NV
Swiss semiconductor manufacturer STMicroelectronics (STM) rounds off the list. The company holds a $42.32 billion market capitalization. As the largest European semiconductor contract manufacturer and design firm, it is a significant supplier of chips across various sectors, including automotive, industrial, and consumer electronics.
Technically, STM’s shares have receded by 14.1% over the past month, but the company still exhibits a year-to-date increase of 30%, surpassing the broader Nasdaq performance.
In Q2, STM reported net revenues of $4.3 billion, marking a 12.7% YoY growth (slightly exceeding the consensus estimate of $4.27 billion). The Automotive segment notably contributed with a 34.4% YoY surge to $1.95 billion in revenues. Despite a 15.2% increase in EPS to $1.06 compared to the previous year, this quarter marked the first time in five quarters that STM missed its EPS projections.
STM managed to slightly reduce its long-term debt from $2.54 billion at the beginning of the year to $2.47 billion by the end of Q2. Although cash flow from operating activities increased by 24% to $1.3 billion YoY, a 9.1% decrease in free cash flow to $209 million remains a concern.
Nevertheless, analysts predict a somewhat bleak earnings growth trajectory, anticipating declines of 7.8% and 22.7% for the current and next quarters, ultimately resulting in modest 2.4% earnings growth for FY 2023.
Despite these forecasts, the consensus rating for STM remains a “Moderate Buy,” with an average target price of $61.50 – indicating a potential 33% upside from current levels. Out of eight analysts covering the stock, five advocate a “Strong Buy,” two recommend a “Hold,” and one suggests a “Strong Sell.”
Key Insights
The global demand for semiconductors is poised to surge, driven by the expansion of generative AI and increased adoption within automotive manufacturing. The three companies spotlighted above are positioned as innovators in the semiconductor arena, particularly with a focus on the stable and growing automotive sector.
Although short-term caution is warranted, especially with Nvidia’s impending earnings announcement, investors seeking advantageous entry points for chip stocks should keep these companies on their radar as the August decline potentially stabilizes.
Featured Image: Freepik @ macrovector
Author Faith Yakubu