Semiconductor stocks got beat up in 2018. At the end of November, the sector was down 5% on the year, and down over 20% from highs reached over the summer as measured by the iShares PHLX Semiconductor ETF (NASDAQ:SOXX).
The reasons for the decline are diverse: a trade war between the U.S. and China, a slowdown in demand from some end markets, and pricing for select chip types starting to weaken. Worried that two years of double-digit gains can't be maintained, some Wall Street analysts began to voice concerns over semiconductors this year.
However, one investor's pain can be another's gain. After a rough year, some semiconductor companies are now incredibly cheap, especially when considering their future prospects. Three of note are Skyworks Solutions (NASDAQ:SWKS), ON Semiconductor (NASDAQ:ON), and NVIDIA (NASDAQ:NVDA).
|Metric||Skyworks Solutions (NASDAQ:SWKS)||ON Semiconductor (NASDAQ:ON)||NVIDIA (NASDAQ:NVDA)|
|Revenue (TTM)||$3.87 billion||$5.75 billion||$12.4 billion|
|Price to free cash flow (TTM)||15.6||16.2||27.6|
|One year forward price to earnings||8.6||9.8||20.6|
Skyworks Solutions recently wrapped up its 2018 fiscal year, posting another record for sales and profits. Revenue of $3.87 billion was 6% higher than the year prior, and adjusted earnings per share (which excludes the effect of tax changes) were up 12% to $7.22.
As more devices around the world get embedded with internet connection-enabling chips, Skyworks has been a primary beneficiary, with its portfolio of connectivity solutions. However, a headwind as of late has been a maturing smartphone market. Consumers in developed countries are opting to replace their phones less often, and smartphone adoption in emerging economies is starting to slow down, too.
That slowdown is expected to cause about a 4% and 5% contraction in revenue and adjusted earnings, respectively, during the company's first quarter of fiscal year 2019. As a result, Wall Street has sent the stock tumbling to prices not seen since 2016 -- even though the company is much larger now than it was then. Skyworks is still on solid footing, though. The internet's reach continues to expand, with more devices getting connected every year, and a new 5G mobile network is only just beginning its initial rollout in the states. Skyworks and its 5G equipment will undoubtedly be called upon to aid in the expansion of that new network in the years ahead, making this stock attractively priced after an unforgiving stretch.
ON Semiconductor used to be a maker of commoditized tech components, which would often send investors on wild rides as supply and demand ebbed and flowed. Today, ON is a much more specialized manufacturer, focusing on power management solutions, connectivity, and sensors. With ON's solutions becoming increasingly important -- especially in automobiles, industrial equipment, and in aerospace and defense -- the company has been on a tear over the last few years.
The company also bought a key competitor back in 2016, helping consolidate the power management chip sector to itself. That has helped drive profitable growth as ON has found ways to cross-sell product to its customers. While revenue is up only 4% in the trailing-12-month period, earnings per share have increased 21%. Thus, it would seem that Wall Street hasn't caught on yet that ON is a different company than it was a few years ago.
During the third-quarter 2018 earnings release, ON provided a rosy outlook for the end of 2018. Sales are expected to accelerate, growing at least 7% year over year, and profit margins on product sold should remain the same, or increase slightly. With ON bucking critical opinions calling for a chip-maker slow-down, its forward price-to-earnings ratio of just 9.8 makes this stock look awfully cheap.
NVIDIA caused investors some serious headache when reporting its third-quarter results. The company needs to work through excess inventory of its mid-priced Pascal graphics cards, slated to be replaced with new AI- and ray tracing-enabled Turing cards. The company expects its video-game business to stall out for a quarter or two as a result as it tries to sell off the old inventory.
Over the course of the last few months, NVIDIA's stock has lost nearly half of its value as Wall Street has grown pessimistic on the former graphics chip darling. However, it looks like investors have forgotten that NVIDIA isn't just a video-game company anymore. While gaming sales still made up 55% of the total in the last quarter, data centers made up 25%, professional visualization 10%, and the auto industry 5%. All three of those segments are still growing by double-digits, which should help offset some of the pain in gaming until it recovers.
As a result of the steep decline in NVIDIA shares, the one-year forward price-to-earnings ratio is at 20.6. That isn't exactly cheap, but bear in mind that figure is assuming NVIDIA doesn't grow at all in the next year. That seems unlikely as challenges in the gaming segment are expected to be solved in quick order, adoption of the company's chips in other areas continues unabated, and management just increased its share repurchase program by another $7 billion. This chip maker thus looks like a great value for the long haul.
Though 2018 will be a year worth forgetting for semiconductor investors, the industry remains on solid footing as technology continues to make inroads into every aspect of our lives. For those who are patient -- or daring enough to add to positions on the dip -- these stocks hold plenty of promise in the years ahead.
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