Chicago, IL – January 10, 2025 – Today, Zacks Equity Research discusses Intel INTC, STMicroelectronics STM, Texas Instruments TXN, NVIDIA Corp. NVDA and SUMCO Corp. SUOPY.
Link: https://www.zacks.com/commentary/2394119/robust-prospects-rich-valuation-in-semiconductors-2-stocks
Companies in the Semiconductor – General industry are at the forefront of the ongoing technological revolution based on HPC, AI, electrified and automated driving, IoT, etc. The semiconductors they produce enable the cloud to function and help analyze data into actionable insights that can be used by companies to operate more efficiently.
Given the strong growth outlook, share prices continue to soar, leading to rich valuations.
Despite concerns about a possible recession, 2024 turned out better than expected. Part of the reason is of course the fact that semiconductors and technology in general constitute one of the pillars balancing out any moderation in the economy.
The latest data coming out of WSTS, which is also typically quoted by the Semiconductor Industry Association (SIA), has global semiconductor sales growing 11.2% this year, on top of a 19% increase in 2024. The IDC also expects double-digit growth, with AI workloads driving demand for high-end logic process chips and high-bandwidth memory (HBM).
Advanced nodes (below 20nm) capacity is expected to increase by 12%, with utilization remaining above 90%. Most of the action is expected to be in Taiwan, the U.S. and Korea. Mature nodes utilization is expected to go from 70% in 2024 to above 75% this year. Wafer production is expected to increase 7%.
Gartner, too, sees a 13.8% increase in semiconductor sales this year coming on top of a 18.8% increase in 2024. The research firm says that the strength is coming off the continued surge in AI-related semiconductor demand and recovery in electronic production, as offset by weakness in automotive and industrial markets.
As far as end markets are concerned, PC growth will also be driven by AI and the end of support for Windows 10. Both commercial and enterprise deployment should increase. Driven by Internet connectivity across the developed and developing worlds and supportive technology such as sensor networks and AI adoption, the IoT market should also grow steadily over the next few years.
Future Market Insights expects the industrial IoT (IIoT) segment alone to grow at a 12.1% CAGR between 2023 and 2033. Gartner says that by 2025, 25% of industrial companies will either acquire or invest in an industrial IoT platform. According to McKinsey, global IIoT spending will jump from $290 billion in 2024 to $500 billion in 2025.
AI and IoT will together continue to revolutionize industrial operations. AI will continue to drive major shifts in auto electrification, industrial automation, data center efficiency and more. The sky seems to be the limit for semiconductor growth.
The U.S. government's target of reducing dependence on China, and onshoring projects with national security implications will shape the future of this industry.
The companies grouped under the Semiconductor – General category produce a broad range of semiconductor devices, both integrated and discrete, like microprocessors, graphics processors, embedded processors, chipsets, motherboards, wireless and wired connectivity products, DLPs and analog, serving multiple end markets. It includes companies like NVIDIA, Texas Instruments, Intel and STMicroelectronics.
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Artificial intelligence is the single largest driver of the industry because of the transformation it is bringing in efficiency, cost-effectiveness, automation, safety, environmental benefits and so forth. AI has become an imperative for effective competition, irrespective of the industry. Technology companies are building their own where possible and buying where it makes sense. For everybody else, this is an investment they have to make. Moreover, the more companies use it, the more necessary it becomes. In this backdrop, data-intensive applications, advancements in machine learning algorithms and increasing urbanization, as well as dynamics in the auto and financial services markets are major drivers. The growth this is spurring in the semiconductor industry is likely to continue for years to come.
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Macroeconomic and geopolitical factors support growth. With interest rates coming down and demand side factors such as inflation also coming under control, we can finally focus on industry specific issues. These too are looking up, with the inventory imbalance now limited to pockets. Geopolitical tensions are adding a dimension to this demand, as countries increasingly adopt the latest technology in defense, infrastructure and other critical applications. As weapon sales accelerate the world over, demand for the most sophisticated underlying electronics will only go up.
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Notwithstanding the fact that the long-term prospects are extremely bright because the industry is on the building-block side of technology, making it crucial for the proliferation of the Internet and the ongoing broad-based digitization, there are some near-term concerns. The automotive electronics segment for instance is an area of evolving needs, as the world continues to move toward EVs and hybrids. However, some recent trends indicate that customers are moving away from premium offerings. ADAS, infotainment and electronic control units (ECUs) remain attractive, with safety and fuel efficiency being top concerns. Automation and robotics, with increasing adoption across industrial operations, are other promising areas but the recovery is slow as of now.
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Semiconductor supply chains are adjusting. Semiconductor supply chains have become increasingly efficient over the years. While this has brought down cost, the just-in-time model has made the supply chains relatively unreliable in case of external disruptions, as happened during the pandemic, or when China imposed its zero tolerance COVID shutdowns. This, along with other factors, such as the U.S.-imposed restraints on dealing with China is leading semiconductor companies to diversify their supply chains and reduce their dependence on the country. This is an ongoing process that will take several years. In the meantime, there is a growing concern that all the most important leading-edge chips are currently made in Taiwan, a country that China has threatened to annex. Since this has national security implications, there is an ongoing drive to onshore manufacturing. The CHIPS Act is facilitating the process.
The Zacks Semiconductor-General Industry is a stock group within the broader Zacks Computer and Technology Sector. It carries a Zacks Industry Rank #195, which places it in the bottom 22% of the 250+ Zacks-classified industries.
The group's Zacks Industry Rank, which is the average of the Zacks Rank of all the member stocks, indicates that near-term prospects are weakening. Our research shows that the top 50% of the Zacks-ranked industries outperforms the bottom 50% by a factor of 2 to 1.
An industry's positioning in the top 50% of Zacks-ranked industries is normally because the earnings outlook for the constituent companies in aggregate is relatively strong. The opposite is true for stocks in the bottom 50% of industries. In this case, the aggregate earnings estimate for 2024 is down 45.5% from the year-ago level, while the aggregate earnings estimate for 2025 is up 62.6% from last year. Big players like Intel, STMicroelectronics and Texas Instruments are seeing their 2024 estimates declining, and this has affected the industry's performance.
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.
Tracking the performance of the Zacks Semiconductor – General Industry over the past year shows that the industry has traded at a premium to both the broader Zacks Computer and Technology Sector and the S&P 500 index throughout the year, steadily widening its lead.
The industry has gained 118.4% over the past year. The broader technology sector gained 35.1% while the S&P 500 index gained 25.5%.
On the basis of forward 12-month price-to-earnings (P/E) ratio, we see that the industry is currently trading at a 36.51X multiple, which is below its median value of 37.87X over the past year. However, since the S&P 500 trades at 22.11X and the sector trades at 27.22X, the industry appears significantly overvalued.
It's worth noting that the industry has traded much closer to the sector in the last 10 years, trailing it at first, then slightly beating it. But it has really pulled ahead from the middle of 2022, most likely because companies are scrambling to acquire the basic building blocks for AI, autonomous driving, defense and other mega trends driving the market today.
The industry continues to look good and it will benefit from further interest cuts this year, which typically drives more money into risky assets. Several of the technology heavyweights in this industry are the backbone of how computing is done these days, so we remain optimistic over the long run. The only stumbling block is the valuation. We continue to like NVIDIA and think that SUMCO is worth keeping an eye on:
NVIDIA Corp.: Santa Clara, CA-based NVIDIA provides graphics, and compute and networking solutions in the U.S., Taiwan, China and other markets. Its graphics processing units (GPUs) are the most popular in the gaming segment. NVIDIA is also at the leading edge of enterprise, data center, cloud and automotive deployments today.
Generative AI is driving exponential growth in compute requirements. Because NVIDIA's accelerated computing is versatile, energy-efficient and has low total cost of ownership, companies are rapidly transitioning to its products to train and deploy AI. NVIDIA GPUs, CPUs, networking, AI foundry services and NVIDIA AI Enterprise software are all growth engines. They are opening up opportunities and leading to broad-based growth across geographies and markets.
The automotive, financial services, healthcare and telecom verticals are particularly strong, as AI and accelerated computing are quickly becoming integral to customers' innovation road maps and competitive positioning. The data center business is the strongest right now, driven by demand for data processing, training and inference from large cloud-service providers and GPU-specialized ones, as well as from enterprise software and consumer internet companies.
NVIDIA is also seeing momentum across professional visualization and automotive (recent collaborations with Mercedes-Benz and Audi). The company also gives away billions to shareholders in dividends and share repurchases.
In the last 60 days, the Zacks Consensus Estimate for the fiscal year ending January 2025 moved up 12 cents (4.3%) and for the following year up 38 cents (10%).
The Zacks Rank #2 (Buy) rated stock is up 163.7% in the past year.
SUMCO Corp.
Tokyo, Japan-based SUMCO (formerly Sumitomo Mitsubishi Silicon Corp.) manufactures and sells silicon wafers for semiconductor manufacturers in Japan, the U.S., China, Taiwan and Korea. The company offers polished, annealed, epitaxial, junction isolated, silicon-on-insulator and reclaimed polished wafers, as well as monocrystalline ingots. It counts both TSMC and Samsung, the leading semiconductor foundries, as its customers.
In the last-reported quarter, Sumco continued to see a moderate recovery in demand for its 300mm wafers for both logic and memory chips, as demand for AI-driven computing continued to accelerate. The softness at 200mm continued however, reflecting industrywide weakness because the recovery in consumer, industrial and automotive markets remained sluggish.
The company continued to harness AI to improve its own productivity and investing in R&D to maintain its share at the leading edge of chip manufacturing.
In the last 7 days, analysts have raised their 2024 estimates by 7 cents (6.5%) and their 2025 estimates by 73 cents (41.2%).
In the past year, this Zacks Rank #3 (Hold) rated stock has slumped 47.5%.
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Intel Corporation (INTC) : Free Stock Analysis Report
Texas Instruments Incorporated (TXN) : Free Stock Analysis Report
STMicroelectronics N.V. (STM) : Free Stock Analysis Report
NVIDIA Corporation (NVDA) : Free Stock Analysis Report
SUMCO (SUOPY) : Free Stock Analysis Report
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