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As the critical component to technology of all types, semiconductors are an important bellwether for the state of the economy. After correcting nearly -50% in 2022, the Semiconductor ETF SMH is off to a great start this year, leading the market higher.
The semiconductor industry powers the electronics industry, and in 2021 sales reached $556 billion, with a record 1.15 trillion semiconductor units sold. The semiconductor industry continues to experience strong growth with an average annual growth rate around 13%, although it is accompanied by significant volatility.
The cyclical, high volatility pattern of growth for the industry, while challenging, can provide exceptional opportunities for discerning investors. Considering the industry recently experienced a deep correction, it seems possible that a buying opportunity has presented itself. If the economy and the market can maintain momentum, semis may be a great place to invest.
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Microchip Technology
Microchip Technology MCHP is a developer and producer of specialized microprocessors for the automotive, industrial, computing, communications, lighting, power supplies, security, and wireless connectivity industries.
MCHP is dominant in the industry regarding 8, 16, and 32 bit controller, which has played a major role in top line growth. Furthermore, the company has benefited from the recovery of demand in industrial, automotive, and consumer electronics following the reopening of the economy. Along with the rest of the industry, supply-chain constraints have been a headwind.
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Nonetheless, Microchip Technologies has solid growth prospects, and currently boasts a Zacks Rank #1 (Strong Buy), indicating a strong earnings revision trend. Current quarter sales are expected to grow 20% YoY to $2.2 billion. Current year sales are expected to grow 23% YoY to $8.4 billion, an impressive growth rate for such a large company.
Additionally, over the last 90 days, expectations for all time frames have been revised significantly higher. Analysts have been in a near unanimous decision in raising the earnings expectations for MCHP.
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MCHP is also quite appealing from a valuation perspective. Trading at 14.6x one-year forward P/E puts it below its 10-year median of 17.5x, and well below the industry average of 19.6x. Furthermore, MCHP offers a 1.7% dividend yield.
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STMicroelectronics
STMicroelectronics STM is one of the strongest names in the market today, posting a 40% return YTD, with a compelling technical trade setup to sweeten the deal. STM is a Swiss based developer and manufacturer of automotive and digital semiconductor products, and the largest producer in Europe.
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STM currently has a Zacks Rank #2 (Buy), indicating a positive earnings revision trend. STM had been a slower growth firm in the chip industry, but that has recently shifted in a major way. After flattish growth for nearly a decade, STM has grown sales 25% in each of the last two years.
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Additionally, the earnings revisions higher are quite significant. Current quarter earnings have been revised higher by 20% over the last 90 days, and next year earnings projections have climbed 15% over the same period.
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The technical picture is very appealing as well. After breaking out of a large consolidation, the stock has built a bull flag. A breakout above $50 should propel the stock to new all time highs. That said, anything below $48 and the technical signal will be invalidated.
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The valuation picture for STM is also interesting. Currently trading at 12x one-year forward earnings, it is significantly below its five-year median. Additionally, STM’s new found growth should further increase the multiple it earns.
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Bottom Line
The Semiconductor industry is a fascinating, very profitable, and critical industry to the economy. After experiencing one of its many cyclical corrections over the last year, it seems the industry is in the midst of another bull run.
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The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.
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