By Philip van Doorn
Semiconductor stocks haven’t risen in a straight line this year, but they have recovered from their last dip in May. Now the group is expected to maintain its head of steam through 2022 with faster growth than the broader stock market. But chip makers as a group trade below the broad indexes on a price-to-earnings basis.
Below is a list of the 10 semiconductor companies expected to increase sales the most through 2023.
Investors are paying close attention to this important technology subsector amid continuing shortages that are affecting many industries and presumably helping pricing for the chipmakers. For example, on Aug. 2, shares of ON Semiconductor Corp. /zigman2/quotes/202641012/composite ON -0.76% rose 12% after the company beat analysts’ expectations for earnings and sales and provided an upbeat outlook . The improved guidance points to a coming round of estimate increases by analysts — the type of action that supports higher share prices over time.
ON CEO Hassane El-Khoury said there’s accelerating demand in “strategic automotive and industrial end-markets.”
Semiconductor performance and valuation
To set the stage, check out this chart showing total returns for the iShares Semiconductor ETF /zigman2/quotes/209255350/composite SOXX -1.12% against the SPDR S&P 500 ETF /zigman2/quotes/209901640/composite SPY -0.10% and the Invesco QQQ Trust /zigman2/quotes/208575548/composite QQQ -0.84% (which tracks the Nasdaq-100 Index /zigman2/quotes/210598364/realtime NDX -0.87% ) from the end of 2019 through July 30:
SOXX holds 30 stocks of the largest U.S.-listed semiconductor manufacturers and companies that make specialized equipment used by chip makers. The ETF is concentrated, with Nvidia Corp. /zigman2/quotes/200467500/composite NVDA +0.15% making up 9.2% of the portfolio. The top five holdings, which also include Broadcom Inc. /zigman2/quotes/200646538/composite AVGO +0.25% , Intel Corp. /zigman2/quotes/203649727/composite INTC -11.68% , Qualcomm Inc. /zigman2/quotes/206679220/composite QCOM -1.07% and Texas Instruments Inc. /zigman2/quotes/202237907/composite TXN -1.10% , make up 35% of the portfolio.
That type of performance would lead investors to expect SOXX to trade higher on a price-to-earnings basis than the broader market, but this isn’t the case. Here’s how forward P/E ratios have moved on a rolling 12-month basis since the end of 2019:
Now let’s look at projected growth rates for sales, earnings per share and free cash flow per share for SOXX, SPX and QQQ through 2023, based on consensus estimates among analysts polled by FactSet.
|ETF||Expected sales increase – 2023||Expected sales increase – 2022||Expected sales increase – 2021|
|iShares Semiconductor ETF||4%||9%||27%|
|SPDR S&P 500 ETF Trust||5%||6%||14%|
|Invesco QQQ Trust||10%||10%||20%|
The semiconductor group is expected to lead for sales growth during a banner 2021 and rank slightly behind QQQ in 2022. The projected sales-growth rate for QQQ is much lower for 2023, but that is pretty far out, considering how much sales (and sales estimates) have increased this year.
Here are growth projections for EPS:
|ETF||Expected EPS increase – 2023||Expected EPS increase – 2022||Expected EPS increase – 2021|
|iShares Semiconductor ETF||-2%||12%||40%|
|SPDR S&P 500 ETF Trust||9%||9%||45%|
|Invesco QQQ Trust||8%||11%||38%|
For EPS, the semiconductor group is expected to remain in the lead through next year, before cooling off in 2023.
Here are growth estimates for free cash flow per share:
|ETF||Expected FCF increase – 2023||Expected FCF increase – 2022||Expected FCF increase – 2021|
|iShares Semiconductor ETF||-10%||20%||26%|
|SPDR S&P 500 ETF Trust||9%||15%||42%|
|Invesco QQQ Trust||10%||15%||30%|