Semiconductors drive major growth across technology. Semiconductor stocks therefore tend to attract a lot of investment attention.
The chips are ubiquitous in today’s world. Chips have applications across industry and can be found in many devices. Just as semiconductors have been integral to progress in the past, so too will they power advances in 5G, AI, telecommunications and computing. It isn’t hard to imagine that semiconductors are indeed very valuable.
Semiconductor stocks have fared well during 2020. Investors have seen some rise massively. This may seem to contradict predictions made by Mckinsey, which expected demand to decrease by 5% to 15% across the industry due to the pandemic. However, there are rarely if ever two factors which have a 1-to-1 correlation, especially in the stock market. Therefore it may not be surprising that semiconductor stocks continue to perform well.
The year is roughly three quarters finished, which means that companies will soon be releasing Q3 earnings numbers. What follows is an overview of several semiconductor stocks to watch this earnings season. They are:
- Texas Instruments (NASDAQ:TXN)
- Semiconductor Manufacturing International Corp. (OTCMKTS:SMICY)
- Nvidia (NASDAQ:NVDA)
- Qualcomm (NASDAQ:QCOM)
- Advanced Micro Devices (NASDAQ:AMD)
Semiconductor Stocks: Texas Instruments (TXN)
Texas Instruments is a semiconductor stock which has shown strength among a strong group of peers. For investors who would like to be among the first to know about Q3 earnings here is the best place to be. The company will be webcasting earnings results on Oct. 30 at 3:30 (CST).
The company blew earnings expectation out of the water in Q2 posting EPS of $1.48 on a consensus of 88 cents. Analysts’ consensus expectations are that it will post an EPS of $1.26 in Q3. TI gave guidance for earnings between $1.14 and $1.34 for Q3 which aligns well with analyst sentiment.
The company has dropped a few percentage points in the previous few days. Further, analysts rate the stock as a “hold.” When TI released earnings for Q2 it noted a few salient facts:
- “Our cash flow from operations of $6.3 billion for the trailing 12 months again underscored the strength of our business model. Free cash flow for the same period was $5.7 billion and 42% of revenue. This reflects the quality of our product portfolio, as well as the efficiency of our manufacturing strategy, including the benefit of 300-millimeter Analog production.
- “We have returned $6.7 billion to owners in the past 12 months through stock repurchases and dividends. Over the same period, our dividends represented 56% of free cash flow, underscoring their sustainability. Together, our stock repurchases and dividends reflect our continued commitment to return all free cash flow to our owners.”
Perhaps Texas Instruments was signaling strength in highlighting its dividend at that time. TXN stock dividends were raised on Sept. 17 from 90 cents to $1.02. TI highlighted its commitment to returning cash to shareholders in the same press release. Since earnings and dividends are tied together, this is an area for investors to track.
Semiconductor Manufacturing International Corp. (SMICY)
Semiconductor Manufacturing International is China’s biggest chip manufacturer. As such it finds itself under scrutiny from the U.S. Government’s Commerce Department. On Sept. 28 the Commerce Department issued a letter to the chip makers regarding new licensing requirements related to the company. U.S. manufacturers now have to obtain a license prior to exporting certain technology to the Chinese chip maker.
The crux of the issue is that U.S. regulators warn that SMIC chips are at risk of being used by the Chinese military. Several state-owned Chinese entities exert control over SMIC, which China has tapped as its semiconductor self-reliance champion. The logic is clear, but the effects have yet to be understood. SMIC is heavily reliant upon the U.S. for chip equipment. U.S. chip makers will be hurt immediately but perhaps the move will galvanize China to develop its chip equipment sector. This could increase the speed of Chinese semiconductor development which is the very thing the law hopes to limit.
Analyst sentiment regarding SMICY stock is polarized eight to 11, “buy” or “sell.” Only three analysts rate it a hold. SMIC is the most representative company for the Chinese semiconductor manufacturing sector so it will be important for many audiences.
The company is a primary chip vendor to Huawei. It is no secret that the Trump administration seeks to stop China’s presumed ascendency to telecommunications dominance. Huawei has been its most visible target in that effort.
SMIC is very likely to suffer in the coming quarters as the pressure ratchets up and new legislation takes effect. Investors should pay attention to SMIC’s earnings reports as they will provide some indication of the Trump administration’s efficacy in this fight.
Nvidia has emerged as a force in the semiconductor industry. But it cannot rise forever. The reason investors should keep an eye on it this earnings season is for the simple fact that it is severely overvalued.
There must come a time when markets come to their senses and reevaluate NVDA stock. Nvidia’s P/E ratio is a sky high 96.05 now. Texas Instrument’s P/E ratio is 26.47, Taiwan Semiconductor (NYSE:TSM) is 24.67, and Intel’s (NASDAQ:INTC) is a low 9.39. Then again, AMD has a P/E ratio above 150, so maybe investors should pay it no mind at all. Perhaps there is no end to the amount of money the markets will pay for a dollar of semiconductor earnings.
Nvidia is going to be under the microscope as regulators question the validity of the ARM deal. I do think investors should really carefully scrutinize stocks like Nvidia. It may be a tech darling right now, but at over $500 per share a lot can go wrong. Perhaps investors will take a deeper dive into Q3 earnings when they are reported Nov. 5. Nvidia is a great company but it’s overheated in my eyes.
Qualcomm will report Q4, and not Q3 earnings on Nov. 4. It has posted an earnings beat in each of the last 4 quarters so it is no surprise that analysts favor it as a “buy” rather than a “hold” 19 to seven.
An important part of Qualcomm’s 5G strategy relates to licensing of its technology. Qualcomm has a “chip-agnostic” licensing program in which it grants licensees access to its over 140,000 patents and patent applications. Licensees then build out 5G technology returning fees and royalties to Qulacomm.
Investors may be curious as to the company’s dividend strategy. Thus, when Qualcomm releases earnings in early November dividend investors will be watching. QCOM stock already carries a dividend payout ratio which is 1.06, clearly unsustainable. The company’s dividend yield is also near a 10-year low. The two factors aren’t positives. Given that price is near a 10-year high, markets may react negatively if the company doesn’t address these issues.
Advanced Micro Devices (AMD)
AMD looks overvalued in the extreme by some measures. And yet its strategy and positioning in an industry with massive upside make it worthwhile based on others. It’s hard to imagine that investors could have picked up shares at under $10 less than three years ago. AMD’s emergence is testament to a well executed strategy under Lisa Su.
AMD’s chips will power both the central and graphics processing units in Sony’s (NYSE:SNE) PlayStation 5 and Microsoft’s (NASDAQ:MSFT) Xbox Series X. The PS5 will be released in the U.S. on Nov. 12. The XboX Series X comes out on Nov. 10. AMD is a force in the gaming industry not only in platform gaming but also in computer gaming. And although revenue of those gaming platforms won’t be counted in Q3 earnings, the news is positive.
In Q2 AMD recorded $1.93 billion in revenue, a 26% year-over-year increase. Strong results like those are a reflection of efficient capital usage but investors have to wonder if the excitement justifies the price. AMD’s sky high 154.34 P/E ratio has to give investors pause.
The company has done very well and has great things ahead. As Q3 earning s come around, I have to wonder if share prices will remain so high without an increase in EPS. Because at some point, that high P/E ratio is going to trigger a sell-off. Investors may not care immediately but at some point I’d imagine they will.
On the date of publication, Alex Sirois did not have (either directly or indirectly) any positions in the securities mentioned in this article.
Alex Sirois is a freelance contributor to InvestorPlace whose personal stock investing style is focused on long-term, buy-and-hold, wealth-building stock picks. Having worked in several industries from e-commerce to translation to education and utilizing his MBA from George Washington University, he brings a diverse set of skills through which he filters his writing.