The prospects were high for semiconductor stocks heading into 2022, but the industry has been hit by curveballs that have upended the market.
Take for instance China's COVID-related lockdowns in key cities where chipmaking factories reside that are only adding additional strain to an already disrupted supply chain. Or the Federal Reserve's plans to hike interest rates, which has sent the 10-year Treasury yield spiking and tech stocks tumbling.
Still, many of the same potential drivers for semiconductor stocks that were in place at the beginning of the year remain: The rollout of 5G and the transformation of the automotive market toward electric vehicles (EVs), for starters.
There's also the digitization of industrial economies – which drives the growth in cloud computing, which drives data center spending, which drives the demand for more and more semiconductors. An eventual easing of supply-chain issues could bring focus back to these potent catalysts.
So while forecasts for a strong start to the year for chipmakers could be described as "inaccurate" as best, to invoke the great Michael Jordan: "I've never lost a game. I just ran out of time." In other words, the growth is there, but time will be needed for the fundamentals to outstrip the very real fears of investors at this moment.
With that in mind, here are five of the best semiconductor stocks for investors looking to find growth in the industry. Some of them are simply fundamentally superior with leadership positions in growing end markets. Others offer some grist for stock pickers who like to look below the surface for opportunities.
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Data is as of May 9. Dividend yields are calculated by annualizing the most recent payout and dividing by the share price. Stocks are listed in alphabetical order.
KLA
- Market value: $47.6 billion
- Dividend yield: 1.3%
The investment thesis for KLA (KLAC, $318.87), which offers semiconductor manufacturing solutions, is simple: Fundamentals and industry outlook. And it's one that remains intact following the company's fiscal third-quarter report.
Sales and earnings were up 28% and 32% year-over-year, respectively. Sales and net income were flat between KLAC's first and second quarters. Notably, guidance was unchanged. Given these data points, the pressure on KLA shares, which are off about 26% this year, has compressed price-to-earnings (P/E) ratios.
Analysts, meanwhile, are more upbeat, with forecasts for earnings to rise more than 43% this year. And KLAC is providing guidance for earnings of $6.03 per share for its fiscal fourth quarter, which would represent 25% sequential growth at the top end of the range.
KLA sports a decent balance sheet with good liquidity over the next 12 months. And it is still throwing off cash – nearly $820 million in the most recent quarter versus $646 million a year ago, though off slightly from its fiscal first-quarter haul of $864 million.
A sure sign of management — or hubris — is their use of cash, the largest expenditure of which were for the company's buyback program and payments of dividends to shareholders.
And behind financial strength and earnings momentum is increasing demand for semiconductors worldwide in the form of a one-two punch. In addition to governments mobilizing to increase production as a means of weaning their economies from reliance on South Korean and Taiwanese chip giants Samsung and Taiwan Semiconductor (TSM), the digitization of daily life is putting chips in everything from doorbells to automotive systems. All of this makes KLAC one of the best semiconductor stocks going forward.
Kulicke and Soffa Industries
- Market value: $3.1 billion
- Dividend yield: 1.3%
Kulicke and Soffa (KLIC, $49.97), which provides semiconductor manufacturing equipment and services, had a good fiscal second-quarter report, with revenues up 13% year-over-year, and earnings per share nearly 65% higher. This followed a stellar fiscal 2021 for the company, where revenues grew 144%, while earnings and earnings per share were up sevenfold.
Margin improvement – an important driver of last year's performance – appears intact despite the swoon in shares, off more than 17% so far this year. For the second-quarter report, the company's gross margin was up 880 basis points (a basis point is one-one hundredth of a percentage point) over the year-ago period and operating margin was up 930 basis points. These are very big gains that drove earnings per share to levels well above revenue increases.
With stellar 2021 results, 2022 results likely will not look so good on a comparative basis (though the company handily beat earnings estimates for its fiscal second quarter). This, combined with a more cautious, if not downright bearish landscape, may make for tough sledding in KLIC shares.
Still, Value Line models an increase in earnings to $6.40 per share in fiscal 2022, up from $6.16 per share in the year prior. If the company can keep margins up, or better yet continue to improve them, there could be earnings surprises that may offer some near-term salve for the shares. Longer term, demand for semiconductors and growth in the EV market, where KLIC is strong, will determine the trajectory of the stock.
If you own KLIC and are waiting it out, there are worse shares to wait with. And Kulicke & Soffa is a solid choice among semiconductor stocks for income investors. It is yielding about 1.3%, and the company has raised the dividend annually since 2019.
Marvell Technology
- Market value: $45.6 billion
- Dividend yield: 0.4%
Everything seems to still be moving in the right direction at Marvell Technology (MRVL, $53.73), except for the share price which is off about 40% since the start of the year. Off the charts, though, the company – which makes semiconductors for data storage, communications and consumer markets – is displaying strong momentum.
In the fourth quarter, for instance, revenue grew 68% year-over-year and annual earnings increased a neat 50%. Looking at how these top-line gains translated into bottom-line growth is a little trickier. And it depends, in part, on an investor's appetite for wading into so-called non-GAAP earnings measures, i.e., the adjustments made to provide a "fairer" picture of performance.
In the case of Marvell, these adjustments seem merited. Specifically, under generally accepted accounting principles for fiscal 2021, almost $1.5 billion was recorded as an expense in the form of stock compensation and the depreciation of intangible assets that showed up on the balance sheet because of acquisitions. These non-cash expenses alone (there were other material adjustments) represent nearly a third of total fiscal 2022 revenues of $4.5 billion.
Therefore, non-GAAP earnings per share of $1.57, up 70% over the year-ago period, perhaps bear greater consideration than the GAAP loss of 53 cents per share.
Under this kind of analysis, cash flow matters, and Marvell threw off $819 million in its last fiscal year – about $40 million more the year before. Management seems confident enough in the future to siphon off $191 million of this to pay dividends, representing a current yield of about 0.4%.
Nvidia
- Market value: $422.4 billion
- Dividend yield: 0.1%
Nvidia (NVDA, $169.50) is another one of the semiconductor stocks featured here where everything is moving in the right direction except for the share price, which is off about 42% this year. Investors who believe in chipmakers and who believe in NVDA, a large cross section, might be inclined to believe this creates an attractive entry point to start building a position in one of the best semiconductors stocks there is.
For its fiscal year ended Jan. 30, revenue was up 61% and earnings per share were 123% higher versus year-ago figures. Notable in this performance is the improvement in margins. Gross margin (sales less the cost of goods sold) increased 230 basis points and the operating margin (profit less operating expenses) by 250 basis points.
The improvement in margins reflects a product mix leaning toward the company's higher-margin offerings. NVDA's guidance of $8.1 billion in revenue for its first quarter represents sequential growth of about 7% and year-over-year growth of about 42%.
There will likely be continued improvement in Nvidia's operating margin, but it will be obscured by a $1.4 billion write-off associated with the termination of the company's deal to buy Arm Limited, which develops and licenses semiconductor architectures and designs. The Federal Trade Commission (FTC), as well as regulatory bodies abroad, took a dim view of the deal, ultimately leading to its demise. Absent the Arm write-off, it looks like operating margin would have been in the neighborhood of 38%, notching yet more improvement over fiscal 2022 margins.
The demise of the Arm deal may have been a blow to Nvidia, but it likely lifted a cloud hanging over the stock. Instead of contemplating what might be, investors can focus on where NVDA is today, which is a company with growing markets, revenues and earnings, and a stellar outlook in a market that is considerably less upbeat.
SiTime
- Market value: $3.4 billion
- Dividend yield: N/A
SiTime (SITM, $163.79) makes silicon-based timing products for use in electronic equipment from mobile phones to graphics and identity cards. Timing is critical to the functioning of digital processing, and the more environments silicon-based – as opposed to quartz – timing devices can be used, the more areas advanced processing can be deployed. Timing, as they say, is everything.
The company estimates there are one to two timing chips per device today, creating a market for 40 billion units. But this will grow to 125 billion units in 2030 as silicon-based timing applications proliferate and as consumers and industries own more connected devices.
SiTime demonstrated significant momentum during 2021, with revenue doubling from $36 million in the first quarter of the year to $76 million in the fourth quarter. And net income for 2021 arrived at $32.3 billion, a marked improvement over the $9.4 billion loss incurred in fiscal 2020.
All of these are non-GAAP figures, which takes into account the significant level of non-cash expenses associated with stock-based compensation at the company. The approximately $31 million of stock-based compensation, if included, would have wiped out almost all of the profits for 2021.
SITM's compensation structure can be viewed as a net positive. It suggests that management is well-incentivized to maintain the momentum in sales and earnings, and for some investors, that may be enough to take the plunge on one of the best semiconductor stocks around.
Some of this momentum may have temporarily waned, with first-quarter 2022 revenues of $70 million, off about 8% from the fourth quarter. Still, revenue nearly doubled on a year-over-year basis. The earnings report, released in early May, gave the shares a nice bump, but could not overcome desultory sentiment in 2022. As it stands now, SiTime's shares are off 44% year-to-date.
Relatively speaking, SITM is a small company, and small companies can get buffeted by circumstances well beyond their control. And while this may well be the case with SiTime, risk-oriented investors might find the company's conservative capital structure – nearly $600 million in cash with no debt and roughly $9 million in a long-term lease as its only significant liability – to be a source of comfort in what will no doubt be more challenging times before the year is out.
The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.
