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Micron & 4 Promising Semiconductor Stocks for Your Portfolio

The semiconductor industry, which is among the 11 sub-industries in the broader technology sector, has been one of the outperformers so far this year. Notably, iShares PHLX Semiconductor ETF SOXX, which represents semiconductor stocks, has witnessed a year-to-date (YTD) gain of approximately 15.7%; while the Technology Select Sector SPDR ETF XLK, which represents the overall technology sector, returned 14.2% YTD.

After a dismal 2015, which witnessed SOXX ETF lose over 3.3%, stocks across the semiconductor landscape rebounded well last year and the momentum is likely to continue this year as well. In 2016, SOXX ETF gained 36.6%, while the XLK ETF returned 12.9%.

Micron Technology Inc. MU was one of the best performers in the semiconductor space last year. The stock clocked solid returns in 2016 and gained approximately 54.8%, outperforming the Zacks Electronic-Semiconductor industry’s return of about 31.9%. The momentum continued this year and the stock has been up 43.5% so far this year, while the industry has just gained 14.8%.

The robust performance is mainly because of the company’s phenomenal results in back-to-back quarters. This has boosted investor confidence in the stock significantly.

The company recently reported strong third-quarter fiscal 2017 results, wherein the top and bottom lines, both, came ahead of the Zacks Consensus Estimate. Micron’s revenues in the quarter jumped 92.1% on a year-over-year basis to $5.566 billion and surpassed the Zacks Consensus Estimate of $5.370 billion.

The year-over-year increase was primarily due to strong DRAM pricing environment and favourable product mix. Also, reported revenues increased on a quarter-over-quarter basis (up 20%), primarily due to pricing improvement in the DRAM and NAND sales volume.

Notably, the company is benefiting from improved pricing for consecutive four quarters, which has helped it to register tremendous year-over-year growth in the top and bottom lines.

Furthermore, Micron is anticipated to benefit from strong demand for NAND flash memory chips, which are used in smartphones and tablets. Driven by new tablet products and greater adoption of solid state drive (SSD), total demand in the NAND flash memory industry could surpass manufacturing capacity, leading to a periodic shortage and higher pricing in the near term.

Additionally, we are positive about the company’s strategy of enhancing capabilities through acquisitions which are likely to boost its top-line performance. The acquisition of Inotera in Dec 2016 is estimated to be accretive to Micron’s DRAM gross margin, earnings per share and free cash flow. According to the company, the acquisition will also have some operational benefits, leading to efficient management of investment levels and cadence followed by alignment with global manufacturing operations.

Looking at the improving selling prices for DRAM and strategic initiatives of expanding in the SSD market, we consider that Micron is one such technology stock which is worthy of remaining in investors’ portfolio.

On the valuation front too, the stock looks attractive. The company currently trades at a forward P/E multiple of 8.6x, significantly lower than the Zacks categorized Electronics-Semiconductor industry average of 15.1x. The ratio, which is obtained by dividing a stock’s current market price with its historical or estimated earnings, measures how much an investor needs to shell out per dollar of earnings. Therefore, lower the P/E of a stock, the better for a value investor.

Hence, we believe that there is still much momentum left in this Zacks Rank #2 (Buy) stock, which is quite evident from its VGM Style Score of “B” and long-term earnings growth rate of 10%.

Other Picks in the Industry

The U.S. economy seems to be rebounding as indicated by impressive economic data for GDP, Consumer Confidence Index, unemployment rate and factory activity data in the last few quarters. We believe that there remain tremendous growth opportunities for semiconductor stocks in 2017.

Notably, as per latest predictions from World Semiconductor Trade Statistics (WSTS), semiconductor sales are likely to increase 3% in 2017 and 2% in 2018.

Right now, the semiconductor segment has several promising stocks to choose from. Here we have picked four semiconductor stocks which have performed well in this year so far and have the potential to retain the momentum in the next year as well. They also have a favorable Zacks Rank #1 (Strong Buy) or #2, and VGM Style Score. You can see the complete list of today’s Zacks #1 Rank stocks here.

Applied Materials Inc. AMAT develops, manufactures, markets and services semiconductor wafer fabrication equipment and related spare parts for the worldwide semiconductor industry. The EPS estimate for the current fiscal has been revised upward to $3.09 from $3.00 per share, over the last 30 days. The stock sports a Zacks Rank #1 and has a VGM Style Score “B.”

·         Year-to-date Return: 28.4%

·         Last EPS Surprise: 4.0%

·         Average 4-quarter Surprise: 3.4%

·         Long-term Expected EPS Growth Rate: 16.6%

MaxLinear Inc. MXL is a provider of radio-frequency analog and mixed signal semiconductor SoC solutions for broadband communication applications offering small silicon die-size, and low power consumption. The EPS estimate for the current fiscal has been revised upward to $1.12 from $1.06 per share, over the last 30 days. The stock sports a Zacks Rank #1 and has a VGM Style Score “B.”

·         Year-to-date Return: 27.9%

·         Last EPS Surprise: 16.7%

·         Average 4-quarter Surprise: 14.6%

·         Long-term Expected EPS Growth Rate: 17.5%

Cypress Semiconductor Corporation CY designs, develops, manufactures and markets a broad line of high-performance digital and mixed-signal integrated circuits. The EPS estimate for the current fiscal has been revised upward to 43 cents from 42 cents per share, over the last seven days. The stock carries a Zacks Rank #2 and has a VGM Style Score “A.”

·         Year-to-date Return: 22%

·         Last EPS Surprise: 300.0%

·         Average 4-quarter Surprise: 83.3%

·         Long-term Expected EPS Growth Rate: 10%

Taiwan Semiconductor Manufacturer Co. TSM is the world's largest dedicated integrated circuit foundry. The stock holds a Zacks Rank #2 and has a VGM Style Score “A.”

·         Year-to-date Return: 21.1%

·         Last EPS Surprise: 1.9%

·         Average 4-quarter Surprise: 3.2%

·         Long-term Expected EPS Growth Rate: 15%

Looking Ahead

The above-mentioned stocks have grabbed the spotlight with striking performances supported by solid earnings results and strong growth projections. With this in mind, we believe investing in these stocks would yield robust returns for your portfolio in the near term.

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Cypress Semiconductor Corporation (CY): Free Stock Analysis Report
 
SPDR-TECH SELS (XLK): ETF Research Reports
 
ISHARS-PHLX SEM (SOXX): ETF Research Reports
 
MaxLinear, Inc (MXL): Free Stock Analysis Report
 
Micron Technology, Inc. (MU): Free Stock Analysis Report
 
Applied Materials, Inc. (AMAT): Free Stock Analysis Report
 
Taiwan Semiconductor Manufacturing Company Ltd. (TSM): Free Stock Analysis Report
 
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