The analog/mixed signal semiconductor market as a whole should continue to grow this year, following a very strong 2024. Macro and geopolitical developments keep us cautious despite the fact that we are currently in a growth cycle in semiconductors. We think there may be opportunities in Magnachip Semiconductor MX and Semtech Corp. SMTC.
The World Semiconductor Trade Statistics (WSTS), which supplies data to the Semiconductor Industry Association (SIA), is projecting double-digit growth in semiconductors this year on the back of a 12.3% increase in integrated circuit (IC) growth (16.8% increase in logic, 13.4% in memory 5.6% in microcontrollers and 4.7% in analog). Sensors, discretes and optoelectronics are expected to grow 7%, 5.8% and 3.8%, respectively. The fastest growth is expected to come from the Americas at 15.4%, followed by the Asia Pacific region at 10.4%, Japan at 9.4% and Europe at 3.3%.
Many of the players in the analog/mixed signal group have increased their exposure to auto and industrial markets, where design wins have more shelf life. The industrial end market is sluggish, notwithstanding the fact that growth prospects over the next 5-10 years remain excellent, because of the adoption of new technologies like AI-ML (machine learning), "smart cities," IoT, etc.
The auto market is driven by growing electrification and increased use of electronics in cars. Electrification will contribute the most this year, but since China is the main "driver" here, there is a good amount of uncertainty.
About the Industry
The electronic gadgets we use to accurately read our commands, and record, store, retrieve and process the information we throw at them run on semiconductor technology, whether analog (enabling the recording and measurement of real-world information), digital (processing information available in machine-readable language) or mixed signal (enabling conversion of analog signals to digital or digital to analog among other things). Most electronic gadgets use a combination of these components, whether in consumer, industrial, auto, medical, communications, or IoT and other markets.
The industry is cyclical and prices are elastic. Players usually serve multiple markets that offset their individual seasonality, or focus on certain core markets for which they have highly differentiated technology and relationships.
Growth Prospects Tempered by Macro and Geopolitics
The semiconductor market is expected to post strong growth this year. Gartner IT estimates that revenue growth will be 12.6% in 2025, with high bandwidth memory (HBM) growing a very strong 66.3%. Growth in 2025 is coming on top of an 18.1% increase in 2024, a year that benefited hugely from AI chips for the data center. Memory grew 71.8% overall, DRAM grew 75.4% and NAND 75.7%. Barring certain segments, end-market strength supports these projections.
Gartner estimates that this year, PC market growth will be facilitated by on-device AI (AI PCs will represent 43% of all PC shipments by 2025, up from 17% in 2024). IDC expects the Windows 10 refresh and on-device AI to remain the biggest drivers with U.S. tariffs and associated inflation as well as the possibility of a global recession being offsetting factors.
Smartphone growth is expected to be 2.3% globally and 3.3% in the U.S., according to IDC, as subsidies by the Chinese government and strength in emerging markets like India and Indonesia are offset by U.S. tariffs.
The auto market, while a smaller consumer of chips, is sluggish at the moment because EV uptake in Europe and the U.S. has slowed, making China the main driver this year. Overall, TechInsights forecasts automotive chip demand growth of 12% in 2025 driven by increased content per vehicle. Overall production is expected to remain slow, barring India and Thailand. Between 2024 and 2028, auto chip demand and revenue are expected to grow at an average CAGR of 11.8% and 12.4%, respectively.
AI is likely to remain a big driver this year. According to Gartner, AI chips will grow 33% this year with 47% of total AI chip revenue coming from the PC market. By 2026-end, all enterprise PC purchases will be AI PCs. Only 5% of companies were using generative AI in 2023, which will grow to 80% by 2026.
Macro and geopolitical uncertainty are hurting demand in the industrial end-market. The high interest rate in the U.S. is leading to lower investment at manufacturing companies and depressing employment numbers. U.S. Tarriff concerns are increasing uncertainties, leading to a drop in new orders, production cuts, destaffing, higher prices and inventory buildup. Both ISM and S&P Global are reporting the sharpest PMI contraction in March 2025. There is nothing to suggest that interest rates will come down significantly or that tariff-related uncertainty will disappear anytime soon. Therefore, this year is likely to remain weak for this end market, with the possibility of improvement next year, if interest rates and tariffs normalize.
IoT, cloud, defense, metaverse, digital health, EVs and other innovative transportation, and sustainability considerations are secular drivers.
In general, semiconductor pricing is robust when capacity is tight and utilization high. However, companies start adding capacity when they anticipate the next big growth cycle which usually continues for several years. AI is the main driver of the current build cycle and significant capacity is being built up today because it will have to suffice for years to come.
While new fab construction, often supported by government initiatives, and their equipping is necessary to drive future growth, it brings additional capacity online, which is a negative for near-term pricing. Supply chain efficiency also has an effect on chip prices.
Historically, semiconductor supply chains have been very efficient, which led to shortages during COVID restrictions. Supply chains have been broadening and rebalancing since then. The exponential increase in chip demand driven by AI, data center, IoT and EVs and strategic imperatives for countries in the race to technological superiority are greatly expanding demand for chips such that capacity is not expanding fast enough. Therefore, pricing should remain strong in the foreseeable future.
An emerging issue that semiconductor players are particularly exposed to is geopolitical tensions. The semiconductor supply chain is globally distributed, which means that international relations need to be maintained to ensure that work continues without disruption. While the Russia-Ukraine war didn’t have that much of an impact, the souring of relations between the U.S. and China is another story.
If China really tries to take control of Taiwan as many experts expect it will, there could be a terrible war that would be highly disruptive to the global economy, and especially the chip sector. That’s because a leading share of advanced node chips are made on the island of Taiwan. Another geopolitical concern is the increasing awareness among all leading nations of the larger role that semiconductors are playing in AI-driven electronic weaponry and surveillance mechanisms.
Zacks Industry Rank Indicates Deteriorating Prospects
The Zacks Semiconductor – Analog and Mixed industry is housed within the broader Zacks Computer and Technology sector. It carries a Zacks Industry Rank of #89, which places it in the top 36% of the nearly 250 Zacks-classified industries. The group’s Zacks Industry Rank, which is basically the average of the Zacks Rank of all the member stocks, indicates strong near-term prospects.
Our research shows that the top 50% of the Zacks-ranked industries outperforms the bottom 50% by a factor of more than 2 to 1. The industry’s positioning in the top 50% of Zacks-ranked industries is based on the earnings outlook for the constituent companies in aggregate. Looking at the aggregate earnings estimate revisions over the past year, we see that analyst opinion about the outlook for both 2025 and 2026 has materially deteriorated, and particularly since November 2024. Overall, the 2025 estimate has dropped 32.5% over the past year, while the 2026 estimate has dropped 39.5%.
Before we present a few stocks that you may want to consider for your portfolio, let’s take a look at the industry’s recent stock-market performance and valuation picture.
Stock Market Performance Continues to Lag
The Semiconductor – Analog and Mixed industry currently trades at a discount to both the broader Zacks Computer and Technology sector and the S&P 500 with the gap widening since November last year.
Overall, the industry lost 24.7% of its value over the past year, while the broader sector lost 1.8% and the S&P 500 gained 2.0%.
One-Year Price Performance
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Industry's Current Valuation
On the basis of forward 12-month price-to-earnings (P/E) ratio, the industry is trading at a 21.83X multiple, which is its 52-week low but a premium to both the S&P 500’s 19.08X and the broader computer and technology sector’s 21.14X.
The industry has traded between the 22X and 29.5X multiples over the past year. The median level was 27.8X.
Forward 12 Month Price-to-Earnings (P/E) Ratio
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2 Stocks Worth Buying
Given the growing macro uncertainty, opportunities in the sector are limited. The following buy-ranked stocks are worth a closer look:
Magnachip Semiconductor Corp. (MX): Cheongju, South Korea-based Magnachip Semiconductor designs and manufactures analog and mixed-signal semiconductor platform solutions for consumer, computing and industrial (including IoT and automotive) electronics OEMs, ODMs and EMS companies, as well as subsystem designers in Korea, the Asia Pacific, the U.S. and Europe. The company sells its products through a direct sales force, as well as through a network of agents and distributors.
Management has decided to focus on the power IC and discrete businesses, as they offer better revenue growth and margin expansion potential. The pipeline of next-gen power products, including the Gen 5 and Gen 6 IGBT, Gen 6 SuperJunction MOSFETs and Gen 8 medium- and low-voltage MOSFETs, along with 40 other power products to be launched in 2025 will unlock new high-value opportunities in automotive, industrial, AI, and high-current applications up to and greater than 100KW.
The display business is now being offloaded, as its limited application in the smartphone market was limiting growth and margin expansion. The new products, on the other hand, will also drive higher revenue per wafer. Management is equipping its Gumi facility to manufacture these devices, which will be optimized for the purpose.
It is expected that these initiatives will enhance shareholder value and help the company deliver quarterly adjusted EBITDA break-even from continuing operations by the end of the fourth quarter of 2025, followed by positive adjusted operating income in 2026 and positive adjusted free cash flow in 2027. The ultimate goal is the achievement of its 3-3-3 Strategy of $300 million annual revenue run-rate with a 30% gross margin in three years.
The company’s earnings beat the Zacks Consensus Estimate by 131.8% in the last quarter. In the last 30 days, the loss estimate for 2025 improved 34 cents (34%). The 32-cent loss for 2026 implies a 51.5% improvement from 2025 levels. Analysts expect that in 2025, the company’s top and line will decline 15% while the bottom line increases 14.3%. For 2026, they are expected to increase a respective 6.6% and 51.5%.
#2 (Buy) ranked Magnachip’s shares are down 42.5% over the past year.
Price and Consensus: MX
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Semtech Corp. (SMTC): Camarillo, CA-based Semtech designs, manufactures and markets a broad range of analog and mixed-signal semiconductors for computer, communications, industrial, military/aerospace and automotive markets.
The company caters to attractive markets where demand for faster, more energy efficient and more sophisticated technology is a constant. Since it also has close technical collaborations with industry players, uptake of its products is secure. Management has three core priorities for the current year, including portfolio optimization and simplification, strategic investment in R&D, and margin expansion, which along with continued debt reduction should generate attractive returns for investors.
Semtech beat earnings estimates by 25% in the fourth quarter of fiscal 2025 (ending January). The Zacks Consensus Estimate for 2026 has increased 4 cents (2.4%) in the last 60 days with the 2027 estimate dropping 5 cents (2.3%) in the same period. Revenue and earnings are expected to increase a respective 15.3% and 93.2% in 2026 and a respective 10.1% and 27.2% the following year.
SMTC shares, ranked #2, have lost 15.8% in the past year.
Price and Consensus: SMTC
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