Semiconductors are the picks and shovels of modern technology. The amount of data we ingest is also increasing exponentially, leading to elevated demand for chips with more processing power. This secular trend bodes well for the industry, which has posted a six-month gain of 32.6% and beat the S&P 500 by 21.3 percentage points.
Although these businesses have produced results lately, investors should tread carefully as not all companies are equipped for the next technological innovation. With that said, here are three semiconductor stocks that may face trouble.
Analog Devices (ADI)
Market Cap: $132.8 billion
Founded by two MIT graduates, Ray Stata and Matthew Lorber in 1965, Analog Devices (NASDAQ: ADI) is one of the largest providers of high performance analog integrated circuits used mainly in industrial end markets, along with communications, autos, and consumer devices.
Why Is ADI Not Exciting?
- Sales tumbled by 5.4% annually over the last two years, showing market trends are working against its favor during this cycle
- Underwhelming 5.9% return on capital reflects management’s difficulties in finding profitable growth opportunities
Analog Devices is trading at $271.51 per share, or 27.8x forward P/E. Check out our free in-depth research report to learn more about why ADI doesn’t pass our bar.
Amtech (ASYS)
Market Cap: $180.2 million
Focusing on the silicon carbide and power semiconductor sectors, Amtech Systems (NASDAQ: ASYS) produces the machinery and related chemicals needed for manufacturing semiconductors.
Why Are We Cautious About ASYS?
- Customers postponed purchases of its products and services this cycle as its revenue declined by 16.3% annually over the last two years
- Ability to fund investments or reward shareholders with increased buybacks or dividends is restricted by its weak free cash flow margin of 6.6% for the last two years
- Push for growth has led to negative returns on capital, signaling value destruction, and its falling returns suggest its earlier profit pools are drying up
Amtech’s stock price of $12.54 implies a valuation ratio of 32.4x forward P/E. Dive into our free research report to see why there are better opportunities than ASYS.
FormFactor (FORM)
Market Cap: $4.32 billion
With customers across the foundry and fabless markets, FormFactor (NASDAQ: FORM) is a US-based provider of test and measurement technologies for semiconductors.
Why Do We Steer Clear of FORM?
- 2.4% annual revenue growth over the last five years was slower than its semiconductor peers
- Incremental sales over the last five years were much less profitable as its earnings per share fell by 5.5% annually while its revenue grew
- Weak free cash flow margin of 3.7% has deteriorated further over the last five years as its investments increased
At $55.75 per share, FormFactor trades at 39.7x forward P/E. Check out our free in-depth research report to learn more about why FORM doesn’t pass our bar.
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