Semiconductors are the picks and shovels of modern technology. The amount of data we ingest is also increasing exponentially, leading to elevated demand for chips with more processing power. This secular trend bodes well for the industry, which has posted a six-month gain of 50.2% and beaten the S&P 500 by 39.1 percentage points.
Regardless of these results, investors must exercise caution as the rapid pace of innovation can easily turn today’s winners into tomorrow’s losers. On that note, here are three semiconductor stocks that may face trouble.
Skyworks Solutions (SWKS)
Market Cap: $10.63 billion
Result of a merger of Alpha Industries and the wireless communications division of Conexant, Skyworks Solutions (NASDAQ: SWKS) is a designer and manufacturer of chips used in smartphones, autos, and industrial applications to amplify, filter, and process wireless signals.
Why Do We Pass on SWKS?
- Customers postponed purchases of its products and services this cycle as its revenue declined by 4.2% annually over the last two years
- Sales are projected to be flat over the next 12 months and imply weak demand
- Overall productivity fell over the last five years as its plummeting sales were accompanied by a decline in its operating margin
At $70.49 per share, Skyworks Solutions trades at 14.2x forward P/E. Read our free research report to see why you should think twice about including SWKS in your portfolio.
Vishay Intertechnology (VSH)
Market Cap: $5.43 billion
Named after the founder's ancestral village in present-day Lithuania, Vishay Intertechnology (NYSE:VSH) manufactures simple chips and electronic components that are building blocks of virtually all types of electronic devices.
Why Should You Sell VSH?
- Muted 3% annual revenue growth over the last two years shows its demand lagged behind its semiconductor peers
- Performance over the past five years shows its incremental sales were much less profitable, as its earnings per share fell by 28.9% annually
- Increased cash burn over the last five years raises questions about the return timeline for its investments
Vishay Intertechnology is trading at $35.30 per share, or 23.4x forward P/E. If you’re considering VSH for your portfolio, see our FREE research report to learn more.
Entegris (ENTG)
Market Cap: $23.24 billion
With fabs representing the company’s largest customer type, Entegris (NASDAQ:ENTG) supplies products that purify, protect, and generally ensure the integrity of raw materials needed for advanced semiconductor manufacturing.
Why Does ENTG Fall Short?
- Flat sales over the last two years suggest it must find different ways to grow during this cycle
- Anticipated sales growth of 15.2% for the next year implies demand will be shaky
- Poor free cash flow margin of 12.8% for the last two years limits its freedom to invest in growth initiatives, execute share buybacks, or pay dividends
Entegris’s stock price of $151.70 implies a valuation ratio of 31.9x forward P/E. Check out our free in-depth research report to learn more about why ENTG doesn’t pass our bar.
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