By Philip van Doorn
The shortage of microchips might prompt an investor to believe that these are golden times for semiconductor manufacturers because high demand and limited supply can combine for higher prices and rising profits.
But the low supply can also hurt sales in the short run. Analysts are sending mixed signals.
So it might be best for investors to focus on the industry players that are expected to increase their sales the most over the next few years.
Earnings season for semiconductor manufacturers is long, running until mid-November. But several of the largest industry players will report financial results this week, according to schedules supplied by FactSet:
Entegris Inc. /zigman2/quotes/200628784/composite ENTG -5.60% will report quarterly results on Oct. 26, before the market opens.
Advanced Micro Devices Inc. /zigman2/quotes/208144392/composite AMD -2.19% will announce results on Oct. 26 after the market closes. Wallace Witkowski previews AMD’s results , which may stand in contrast with last week’s disappointment for Intel Corp. /zigman2/quotes/203649727/composite INTC -1.60% .
STMicroelectronics NV /zigman2/quotes/207734906/composite STM -1.26% will report on Oct. 28, before the market opens, as will United Microelectronics Corp. /zigman2/quotes/207234499/composite UMC +1.75% and ASE Technology Co. /zigman2/quotes/205693818/composite ASX -1.48% .
Monolithic Power Systems Inc. /zigman2/quotes/204177258/composite MPWR -1.92% will report after the close on Oct. 28.
An analysis of longer-term sales-growth prospects for the 30 components of the iShares Semiconductor ETF /zigman2/quotes/209255350/composite SOXX -1.75% is below.
Short-term or long-term?
Are you a long-term investor or a stock trader? That’s an important question when it comes to the semiconductor industry group.
Consider this comment from Cowen Research analyst Krish Sankar in his earnings preview for the semiconductor industry on Oct. 12: “We really like the sector, but the next catalyst feels like Intel analyst day (11/18) rather than this earnings season.” That was from a “trading standpoint,” he wrote.
Sankar also wrote that the fundamentals for semiconductor manufacturers remained strong, but added that “the stocks can’t seem to hit escape velocity from double ordering and memory cycle concerns.”
Demand for data storage runs in cycles. But demand for microprocessors for myriad applications, from electric vehicles to just about any electric device or appliance you can imagine, seems likely to continue increasing over the years.
Sankar’s colleague Joseph Giordano tied the current economic environment (which features shortages of materials, semiconductors and labor, among other things) with a longer-term thesis in his “Seeing Robots Everywhere” report on Oct. 18. “If 100 humans are required but only 50 will be available, then robotics must fill that void,” he wrote.
Giordano believes we are still in the early stages for development of robotics, but he added that “deployments are scaling, and we are well past the conceptual stage as companies are acting now to protect their futures.”
That concept — companies protecting themselves by automating various processes — points to the continued growth of demand for all sorts of electronic components. The long-term thesis for chip makers and related equipment and systems providers remains solid.
And the industry as a whole isn’t trading at a premium to the broad U.S. stock market, as represented by the S&P 500 Index /zigman2/quotes/210599714/realtime SPX -1.90% . The SOXX group trades for 19.6 times weighted consensus earnings estimates for the next 12 months among analysts polled by Fact Set — below the forward price-to-earnings ratio of 20.9 for the SPDR S&P 500 ETF Trust /zigman2/quotes/209901640/composite SPY -1.95% .
Regardless of the industry’s valuation based on the next year’s earnings, long-term investors looking to book significant profits a few years down the line might want to focus on the industry players expected to increase their sales the most.