1 Semiconductor Stock to Own for Decades and 2 Facing Challenges
Semiconductors are the silicon backbone of the digital revolution. Compute-intensive AI workloads are also priming them for the next wave of secular growth, so it’s no wonder the industry has outperformed the market over the past six months, delivering returns of 48.7% compared to 13.6% for the S&P 500.
Although these businesses have produced results lately, investors should tread carefully as not all companies are equipped for the next technological innovation. On that note, here is one semiconductor stock poised to generate sustainable market-beating returns and two we’re steering clear of.
Two Semiconductor Stocks to Sell:
Lattice Semiconductor (LSCC)
Market Cap: $16.46 billion
A global leader in its category, Lattice Semiconductor (NASDAQ:LSCC) is a semiconductor designer specializing in customer-programmable chips that enhance CPU performance for intensive tasks such as machine learning.
Why Are We Wary of LSCC?
- Sales trends were unexciting over the last two years as its 1.9% annual growth was below the typical semiconductor company
- Expenses have increased as a percentage of revenue over the last five years as its operating margin fell by 16.8 percentage points
- Free cash flow margin didn’t grow over the last five years
Lattice Semiconductor is trading at $115.90 per share, or 43.6x forward P/E. If you’re considering LSCC for your portfolio, see our FREE research report to learn more.
Penguin Solutions (PENG)
Market Cap: $2.65 billion
Based in the US, Penguin Solutions (NASDAQ:PENG) is a diversified semiconductor company offering memory, digital, and LED products.
Why Should You Sell PENG?
- 2.5% annual revenue growth over the last five years was slower than its semiconductor peers
- Gross margin of 28.3% reflects its high production costs
- Poor free cash flow margin of 3% for the last two years limits its freedom to invest in growth initiatives, execute share buybacks, or pay dividends
Penguin Solutions’s stock price of $51.90 implies a valuation ratio of 16.3x forward P/E. Dive into our free research report to see why there are better opportunities than PENG.
One Semiconductor Stock to Buy:
KLA Corporation (KLAC)
Market Cap: $242.5 billion
Formed by the 1997 merger of the two leading semiconductor yield management companies, KLA Corporation (NASDAQ:KLAC) is the leading supplier of equipment used to measure and inspect semiconductor chips.
Why Are We Bullish on KLAC?
- Impressive 14.4% annual revenue growth over the last five years indicates it’s winning market share this cycle
- Excellent operating margin of 40.6% highlights the efficiency of its business model, and it turbocharged its profits by achieving some fixed cost leverage
- Impressive free cash flow profitability enables the company to fund new investments or reward investors with share buybacks/dividends
At $185.62 per share, KLA Corporation trades at 33.8x forward P/E. Is now the time to initiate a position? Find out in our full research report, it’s free.
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