Semiconductors are the picks and shovels of modern technology. Still, they’re subject to swings in the broader economy because customers often stockpile chips ahead of demand, and investors seem to believe that inventory levels are correcting – over the past six months, the industry has shed 7.5%. This drawdown is a stark contrast from the S&P 500’s 9% gain.
The elite companies can churn out earnings growth under any circumstance, however, and our mission at StockStory is to help you find them. With that said, here is one semiconductor stock poised to generate sustainable market-beating returns and two we’re steering clear of.
Market Cap: $164 billion
Headquartered in Dallas, Texas since the 1950s, Texas Instruments (NASDAQ:TXN) is the world’s largest producer of analog semiconductors.
Why Does TXN Worry Us?
Annual sales declines of 11.6% for the past two years show its products and services struggled to connect with the market during this cycle
Efficiency has decreased over the last five years as its operating margin fell by 5.8 percentage points
Free cash flow margin shrank by 28.4 percentage points over the last five years, suggesting the company is consuming more capital to stay competitive
At $183.24 per share, Texas Instruments trades at 30.5x forward price-to-earnings. If you’re considering TXN for your portfolio, see our FREE research report to learn more.
Market Cap: $3.36 billion
A leading supplier of parts for electronics such as home appliances, Power Integrations (NASDAQ:POWI) is a semiconductor designer and developer specializing in products used for high-voltage power conversion.
Why Do We Pass on POWI?
Flat sales over the last five years suggest it must find different ways to grow during this cycle
Day-to-day expenses have swelled relative to revenue over the last five years as its operating margin fell by 10.2 percentage points
Falling earnings per share over the last five years has some investors worried as stock prices ultimately follow EPS over the long term
Power Integrations is trading at $59.99 per share, or 39.4x forward price-to-earnings. Check out our free in-depth research report to learn more about why POWI doesn’t pass our bar.
Market Cap: $33.45 billion
Founded in 1997 by its longtime CEO Michael Hsing, Monolithic Power Systems (NASDAQ:MPWR) is an analog and mixed signal chipmaker that specializes in power management chips meant to minimize total energy consumption.
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