Semiconductor stocks have been a mixed bag so far this year. In aggregate, they are beating the overall stock market’s return but the dispersion of returns is quite high.
The group had a decent year in 2013 when revenues began to pick up again as the global economy continued to scratch towards a sustainable recovery. After declining in 2012, revenues for the industry showed low single-digit growth, and sales growth is expected to improve in 2014.
According to research firm Standard and Poors, the industry should be somewhat fragmented in 2014. The communications and consumer end markets will be the strongest as carriers continue the upgrade cycle and smartphones continue to show strong sales growth. The PC market should continue to be the laggard as consumers continue to favor tablet computers over traditional PCs and laptops.
This split among industry segments has created some value opportunities as those companies with high exposure to PCs are very cheap. And while the move towards smart phones and tablets may continue, the PC is not dead — demand will pick up along with the economy.
Alpha and Omega Semiconductor (AOSL)
Alpha and Omega Semiconductor (AOSL) is a designer, developer and global supplier of a broad portfolio of power semiconductors. The portfolio of power semiconductors includes more than 1,400 products, and has grown rapidly with 195 new products introduced last year alone. Its semiconductors are used in a wide range of products, including things like personal computers, flat panel TVs, LED lighting, smart phones, and telecommunications equipment.
The has a heavy reliance on PC sales, but is taking steps to diversify away from that marketplace. Last year, 46% of sales came from PC-related products such as notebooks, motherboards and notebook battery packs. To offset its exposure to this weak market segment, AOSL has been broadening its product portfolio to make inroads into other market segments like the consumer, communication and industrial market segments. Management has also implemented cost-cutting measures such as scheduled shut downs, headcount reduction and compensation reduction of selected employees.
The company has been struggling, but CEO Mike Chang is confident it’s on the right track. He commented on the recent earnings report, telling investors:
“[Our] recovery plan to gain market share and diversify our product offering in new markets is working. With the strength in bookings driven by our design wins across all market segments in which we play, we remain confident to achieve revenue growth and operating profitability for calendar year 2014.”
Chang owns more than 16% of the shares outstanding, so he has good reason to want the stock price higher over the next several years.
If he is even close to correct, AOSL stock is incredibly cheap at the current price, trading at less than 70% of book value. There is a hidden asset in the form of 377 patents and 203 patent applications in the United States that are carried at no tangible value on the books. The balance sheet is solid, with very little debt of any type and more than $100 million in cash, so AOSL should be able to survive until it can thrive in a stronger global economic recovery.
As of this writing, Tim Melvin was long AOSL.