Semiconductors are the core infrastructure powering the Information Age. But they’re also susceptible to economic fluctuations as chip demand will ebb and flow with capital spending. Unfortunately, the market seems to be predicting a downturn as the industry has tumbled by 8.6% over the past six months. This performance is a far cry from the S&P 500’s 7.2% ascent.
Investors should tread carefully as timing cyclical companies is a challenging task, and any misstep can have you catching a falling knife. With that said, here are three semiconductor stocks we’re passing on.
Amtech (ASYS)
Market cap: $223.2 million
Focusing on the silicon carbide and power semiconductor sectors, Amtech Systems (NASDAQ: ASYS) produces the machinery and related chemicals needed for manufacturing semiconductors.
Why Is ASYS Risky?
- Products and services are facing significant end-market challenges during this cycle as sales have declined by 11.7% annually over the last two years
- Responsiveness to unforeseen market trends is restricted due to its substandard operating margin profitability
- Negative returns on capital show management lost money while trying to expand the business, and its shrinking returns suggest its past profit sources are losing steam
Amtech is trading at $12.77 per share, or 12.8x forward EV-to-EBITDA. Dive into our free research report to see why there are better opportunities than ASYS.
Semtech (SMTC)
Market cap: $11.89 billion
A public company since the late 1960s, Semtech (NASDAQ: SMTC) is a provider of analog and mixed-signal semiconductors used for Internet of Things systems and cloud connectivity.
Why Are We Wary of SMTC?
- Costs have risen faster than its revenue over the last five years, causing its operating margin to decline by 16 percentage points
- Free cash flow margin dropped by 10.6 percentage points over the last five years, implying the company became more capital intensive as competition picked up
- Negative returns on capital show that some of its growth strategies have backfired
Semtech’s stock price of $128.11 implies a valuation ratio of 26x forward P/E. Check out our free in-depth research report to learn more about why SMTC doesn’t pass our bar.
Universal Display (OLED)
Market cap: $3.78 billion
Serving major consumer electronics manufacturers, Universal Display (NASDAQ: OLED) is a provider of organic light emitting diode (OLED) technologies used in display and lighting applications.
Why Does OLED Fall Short?
- Products and services are facing significant end-market challenges during this cycle as sales have declined by 1.2% annually over the last two years
- Anticipated sales growth of 4.9% for the next year implies demand will be shaky
- Day-to-day expenses have swelled relative to revenue over the last five years as its operating margin fell by 5.9 percentage points
At $83.93 per share, Universal Display trades at 18.9x forward P/E. If you’re considering OLED for your portfolio, see our FREE research report to learn more.
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