Semiconductors exist in many items we use and are regarded as the brains of electronics. Consumers find chips in products ranging from electric vehicles (EVs) to cars, smartphones, computers, TVs, fridges, kitchen appliances and LED bulbs. Developments in artificial intelligence (AI), robotics, the Internet of Things (IoT) and machine learning have added significantly to the global demand for chips. However, the industry has been making headlines in recent weeks due to chip shortage. Therefore, I’ll introduce seven stocks that depend on semiconductors.
The chip sector mostly relies on outsourced manufacturing, know as the “fab” or “foundry” model. Semiconductor companies first design and develop the chip in-house that then have it manufactured elsewhere.
Research by Douglas B. Fuller of the Johns Hopkins University Applied Physics Laboratory highlights, “Although the rise of Taiwan’s foundries arguably lowered the American share of global fabrication capacity (and today, even cutting-edge fabrication capacity), this rise benefited both American fabless design firms and capital equipment makers by creating reliable suppliers and consumers, respectively.”
As the pace of digitalization has increased during the pandemic, semiconductor stocks have been firing on all cylinders. In the past 52 weeks, the PHLX Semiconductor Sector Index returned about 79%. With that information, here are seven semiconductor stocks to buy in May:
- Baidu (NASDAQ:BIDU)
- Fidelity MSCI Consumer Discretionary Index ETF (NYSEARCA:FDIS)
- Ford Motor (NYSE:F)
- Innovator Loup Frontier Tech ETF (NYSEARCA:LOUP)
- Iridium Communication (NASDAQ:IRDM)
- Microsoft (NASDAQ:MSFT)
- Peloton Interactive (NASDAQ:PTON)
Now, let’s dive in and take a closer look at each one.
Semiconductors: Baidu (BIDU)
52-Week Range: $90.94 – $354.82
Year-to-Date (YTD) Price Change: Down about 9%
Our first stock is the China-based Baidu. It is the country’s leading Internet search provider that is fast becoming an AI giant. In fact, the company holds the largest portfolio of AI patents and applications in China. It is also the country’s top name in autonomous vehicle technology. As a result, the company relies heavily on semiconductors.
Baidu released fourth-quarter and full year numbers in mid-February. Revenue came at $4.64 billion, an increase of 5% year-over-year (YOY). Non-GAAP net income was $1.05 billion, a decline of 25%. Diluted earnings per share (EPS) came at $3.08. Management wants to put increased resources into driverless cars, AI, as well as streaming entertainment.
BIDU stocks’ forward price-earnings (P/E) and price-sales (P/S) ratios are 20.3 and 4.26, respectively. Most China-based tech names have come under pressure in recent weeks. Interested investors could regard a fall toward the $200 level as a better entry point. Like Alibaba, BIDU stock also needs to be on your radar if you believe in the growth of high-tech developments, particularly in China.
Fidelity MSCI Consumer Discretionary Index ETF (FDIS)
52-Week Range: $43.64 – $81.75
YTD Price Change: Up about 12%
Dividend Yield: 0.58%
Expense Ratio: 0.08% per year
We continue our discussion with an exchange-traded fund (ETF), namely the Fidelity MSCI Consumer Discretionary Index ETF. The fund invests mainly companies stateside that offer non-essential products and services. Such discretionary items can be grouped into manufactured items (like cars, household durable items, apparel, and leisure equipment) and services (like restaurants, hotels, casinos, retailers, and cinemas).
Since its inception in October 2013 net assets have reached $1.52 billion. FDIS, which has 274 holdings, tracks the MSCI USA IMI Consumer Discretionary Index. The sectoral breakdown includes: internet and direct marketing retail (25.32%), specialty retail (20.36%), hotels, restaurants and leisure (18.14%), automobiles (12.49%), textiles, apparel and luxury goods (6.75%), household durables (5.12%), and others.
The top 10 companies account for about 54% of the fund. Amazon (NASDAQ:AMZN), Tesla (NASDAQ:TSLA), Home Depot (NYSE:HD) and Nike (NYSE:NKE) are among the top names in the fund. InvestorPlace.com readers would want to know that the weighting of AMZN and TSLA shares is 21.15% and 10.11%, respectively. Thus, a large price move in either name affects this top-heavy fund.
A closer inspection of the holdings will show that the digitalization trend is increasingly making these businesses rely on technology, and hence semiconductors. Over the past year, FDIS has returned in excess of 75% and seen a record high recently. Trailing P/E and price-book (P/B) ratios are 33.16 and 6.92, respectively. A potential decline toward the $77 level would improve the margin of safety.
Semiconductors: Ford Motor (F)
52-Week Range: $4.52– $13.62
YTD Price Change: Up more than 32%
Legacy automaker Ford Motor has about 12.5% market share in the U.S. and about 7% share in Europe. Management is currently putting more resources into the EV space. Last week, Ford announced Q1 2021 earnings. Revenue increased 5.6% YOY to $36.2 billion. The bottom line, which showed a $2 billion loss in Q1 2020, turned black this year and recorded $3.3 billion in net profit. Accordingly, last year’s first quarter adjusted diluted loss of 23 cents per share improved to 89 cents diluted EPS in the first quarter of this year. Cash and equivalents at the end of the quarter stood at $21.8 billion.
Ford updated its 2021 outlook to account for the semiconductor shortage, a difficulty exacerbated by a recent supplier fire in Japan. The car maker now expects to lose about 50% of its planned Q2 production. Management anticipates the flow of semiconductors from Japan to resume by the end of the Q2. But the broader global semiconductor shortage may not be fully resolved until 2022.
In the past 12 months, Ford shares are up over 139% and they are trading at 11.48x of its consensus forward P/E ratio. The stock’s P/S ratio on the other hand stands at 0.36. The current chip shortages will likely create short-term headwind for the shares. Potential investors could regard any dip in price as a good opportunity to buy F stock.
Innovator Loup Frontier Tech ETF (LOUP)
52-Week Range: $25.70 – $64.33
YTD Price Change: Up about 4%
Dividend Yield: 0.7%
Thematic investment approaches have been getting increased investor attention. One theme that is popular is disruptive technologies, which “create growth in the industries they penetrate or create entirely new industries through the introduction of products and services that are dramatically cheaper, better, and more convenient.”
Our next discussion centers on another fund, namely the Innovator Loup Frontier Tech ETF. It provides exposure to companies that are at the forefront of the developments in AI, robotics, autonomous vehicles and virtual reality. Businesses in these fields rely on semiconductors.
LOUP, which has 30 stocks, tracks the returns of the Loup Frontier Tech Index. It started trading in July 2018 and assets under management stand at $94 million.
Information technology, IT, (71.18%), industrials (12.32%), consumer discretionary (8.77%), communication services (4.73%) are the main sectors represented in the fund. At present, more than 4o% of the fund is in the top 10 stocks. E-commerce platform Affirm (NASDAQ:AFRM), streaming platforms operator Huya (NYSE:HUYA) and Baidu lead the names in the roster.
About 66% of the companies come from the U.S., followed by China (12.38%), Japan (5.90%), Austria (4.34%), Italy (3.10%) and the United Kingdom (2.95%).
LOUP has returned more than 104% in the past year and hit an all-time high in mid-February. Those investors that want global exposure might consider buying the dips in the fund.
Semiconductors: Iridium Communication (IRDM)
52-Week Range: $19.18– $54.65
YTD Price Change: Down about 7%
McLean, Virginia-based satellite operator Iridium Communication offers voice and data communications services and products. Its customers come from a range of industries, including maritime, aviation, emergency, humanitarian services, mining, forestry, oil and gas, heavy equipment, transportation and utilities.
It also provides services to the U.S. Department of Defence, as well as other civil and government agencies around the world. Iridium’s customers can send or receive messages from anywhere in the world at any time. Needless to say, this high-tech business relies on semiconductors.
The company announced Q1 2021 results on April 20. Revenue increased 1% YOY and reached $146.5 million. First quarter net loss was $5.2 million or 4 cents per share. A year ago, net loss had been $31.7 million, or 24 cents per share. The company ended the quarter with $222.3 million in cash.
CEO Matt Desch cited, “Iridium delivered first quarter results in line with our forecast… Subscribers grew at a double-digit pace, led by ongoing demand for consumer-oriented IoT devices, and Iridium’s commercial IoT subscribers eclipsed one million users on our network this quarter.”
Management also reiterated its 2021 full year outlook. It expects to achieve 3% growth in total service revenues, which comprises nearly 80% of the total top line. In 2020, Iridium’s total service revenue was $463.1 million. The service segment is a high-margin operation with recurring revenues. The 2021 operational EBITDA is estimated to be in the $365-375 million range vs. $355.6 million in 2020.
In the past year, IRDM stock has returned over 75%. The shares are trading at 8.52x of sales, pointing to a frothy valuation by historic levels. Interested investors would find better value around the $35 level.
52-Week Range: $175.68 – $263.19
YTD Price Change: Up about 11%
Dividend Yield: 2.2%
Next on our list is Microsoft, one of the most important technology names. The company has been relying on Intel (NASDAQ:INTC) to supply chips for its products. But in late 2020, the market learned that Microsoft would be making its own chips. Management also introduced the Microsoft Pluton processor. Therefore, we should expect to hear more about Microsoft’s entry into the world of semiconductors.
In late April, the tech giant announced Q3 FY21 metrics. Revenue came at $41.7 billion, up 19% YOY. Non-GAAP net income was $14.8 billion, an increase of 38% YOY. Non-GAAP diluted EPS was $1.95, up 39% YOY. Cash and equivalents at the end of the period was $13.7 billion, up 17% YOY. Management’s forward-looking statements mean investors can possibly expect another robust quarter in Q4,
Management emphasized the importance of the Intelligent Cloud segment, the fastest-growing business unit where revenue went up by 23%. CFO Amy Hood cited, “The Microsoft Cloud, with its end-to-end solutions, continues to provide compelling value to our customers generating $17.7 billion in commercial cloud revenue, up 33% year over year.”
MSFT stock’s P/E and P/S ratios are 31.93 and 12.61. The Street agreed it was a strong quarter. But since the release of the quarterly numbers, investors’ reaction has been rather negative, leading to a decline in the share price. Buy-and-hold investors could regard these levels as a potential entry point.
Semiconductors: Peloton Interactive (PTON)
52-Week Range: $35.21 – $171.09
YTD Price Change: Down about 45%
A number of businesses have seen a bug surge in popularity in the past year. The New York-based Peloton Interactive, which provides an interactive fitness platform, has been one of those names. It experienced high growth when gyms were closed during the lockdowns. With its technology-enabled and connected fitness classes, the company relies heavily on semiconductors.
Peloton announced Q2 results of FY2021 in February. Total revenue came at $1.6 billion, a 128% YOY growth. Connected Fitness segment revenue was $870.1 million, a 124% YOY growth.. Net income hit $63.6 million versus a net loss of $55.4 million in the same period last year. Diluted EPS came at 18 cents.
Regular InvestorPlace.com readers might remember that connected Fitness Product revenue consists of sales of bike and related accessories, while subscription revenue is generated from monthly Connected Fitness subscriptions and digital subscriptions.
As the vaccine rollout continues and businesses, the shares have come under pressure. Many individuals are heading back to their local gyms as the economy opens up. The stock’s forward P/E and P/S ratios stand at 107.51 and 10.58, respectively. A potential decline toward $95 would offer better value in the shares of the leader in interactive fitness.
On the date of publication, Tezcan Gecgil did not have (either directly or indirectly) any positions in the securities mentioned in this article.
Tezcan Gecgil has worked in investment management for over two decades in the U.S. and U.K. In addition to formal higher education in the field, she has also completed all 3 levels of the Chartered Market Technician (CMT) examination. Her passion is for options trading based on technical analysis of fundamentally strong companies. She especially enjoys setting up weekly covered calls for income generation.