Semiconductor Q3 2022 Overview

This article was originally published on Forbes on Aug 12, 2022,01:21 pm EDT

Semiconductor stocks have gained prominence due to growth drivers such as artificial intelligence, high-performance computing, 5G, robotics, machine learning, and electric vehicles. Despite semiconductor companies underperforming YTD, there is evidence that more supply will come online by the end of the year that will be met with equal or greater demand. Here is what AMD stated in their most recent earnings call:

“Certainly, on the Embedded side, we were supply constrained in the second quarter. And even on the Server side, we were tight in the second quarter. We have additional supply that’s coming online, especially as we get towards the end of the year. That will help us really meet more of the demand from customers. So, we feel pretty good about all of those puts and takes.”

Below, we review the stocks in the sector to find out which companies stand out in terms of revenue growth, profits, cash flows, and earnings surprise.

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Top Semiconductor stocks with the highest revenue growth rates for the current fiscal year

Revenue Growth Estimate for Current Fiscal Year - SOURCE: YCHARTS AND SEEKING ALPHA

Indie Semiconductor is leading with the expected year-over-year growth of 131% in the current fiscal year. The company is benefitting from the growth trend in advanced-driver assistance systems and electric vehicles. The company expects to be profitable by the end of 2023. The company has a Serviceable Addressable Market (SAM) of $40 billion by 2026. The company supplies chips and software to the automobile sector. Its chips power sensor capabilities like LiDAR and Radar, and vehicle electrification.

Monolithic Power Systems (MPWR) is expected to grow 50% in the current fiscal year. The company’s recent Q2 2022 results were strong. Revenue grew by 57% YoY to $461 million, beat the analysts' estimates by $30.41 million. The adjusted EPS came at $3.25 and beat estimates by $0.31. The Storage & Computing revenue grew by 112% YoY to $122 million; enterprise data revenue grew by 118% YoY to $65 million, and automotive grew by 25% YoY to $61 million. The management expects Q3 revenue of $490 million, representing a 51% YoY growth at the mid-point of the guidance. It was also significantly higher than the analysts' initial estimate of $400 million.

Top Semiconductor stocks with the highest revenue growth rates for the next fiscal year

Revenue growth estimate for the next fiscal year - SOURCE: YCHARTS AND SEEKING ALPHA

Aehr Test Systems has developed a unique technology that provides tangible benefits for testing emerging semiconductor components, such as silicon carbide and silicon photonics. Silicon carbide (SiC) is increasingly being used in EVs, while silicon photonics is being integrated into edge computing data centers. Tesla was the first to start using SiC in its vehicles with its Model 3. More EV manufacturers could follow suit due to SiC’s ability to withstand hostile conditions, improve efficiencies, and lower failure rates.

The company’s recent fiscal year ending May 2022 results were strong as revenue grew by 206% YoY to $50.8 million. The adjusted net income was $11.7 million or $0.42 per share compared to an adjusted net loss of $3.2 million or $(0.13) per share in the previous year. The management has guided revenue of $65 million for the FY ending May 2023, representing a YoY growth of 28% at the mid-point. The analyst expects revenue to grow 22% in FY ending May 2023 and 60% in the next fiscal year ending May 2024.

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Semiconductor Stocks with Top Forward P/S multiples

PS Ratio (Forward) - SOURCE: YCHARTS

The companies that outperform the market deserve a premium valuation. Nvidia is leading the sector. Nvidia has a solid long-term growth prospect in AI data centers and from the automotive chips. Similarly, Wolfspeed, which is a leading company in Silicon Carbide Technology, has a premium valuation.

Ambarella is another notable company trading at a fwd P/S ratio of 10. The company’s chips which were previously popular for using in drones and cameras have recently found a niche in the automobile sector. The company’s AI computer vision chips benefit from the Internet of Things, ADAS, and autonomous driving.

Quarterly Revenue Surprise

Quarterly Revenue Surprise - SOURCE: YCHARTS

Semiconductor Equipment Company ACM Research crushed the analyst’s consensus revenue estimates by 44%. The company’s Q2 revenue grew by 94% YoY to $104.4 million. The revenue also included $12.9 million that could not be shipped in Q1 due to the Covid-related restrictions in China. The company also maintained the revenue guidance for the year 2022 in the range of $365 million to $405 million, representing a YoY growth of 48% at the mid-point of the guidance.

Texas Instruments beat analysts' revenue estimates by 12%. The company’s Q2 revenue grew by 14% YoY to $5.2 billion. Susquehanna analyst Christopher Rolland in a note to the clients said, "[Texas Instruments] reported better results and guidance, in part as management overestimated China shutdown impacts of ~10% of [second-quarter] sales (~$500mln), and in part on the back of solid Automotive and Industrial demand,"

Top ranked semiconductor stocks based on Free Cash Flow Margin

Top ranked semiconductor stocks based on Free Cash Flow Margin - SOURCE: YCHARTS

Companies with a high cash flow margin also have a premium valuation. ASML Holding is leading the sector with the highest free cash flow margin. This is an important financial metric in the current environment, and we have noticed in the last few earnings seasons that shares were sold off when companies fell short on this metric.

Top ranked semiconductor stocks based on Net Profit Margin

Top ranked semiconductor stocks based on Net Profit Margin - SOURCE: YCHARTS

Texas Instruments leads the sector in this metric with a 44% net profit margin in the company’s recent quarterly results. Leading foundry, Taiwan Semiconductor, ranks second with a 41% net profit margin. TSMC’s revenue growth was strong, with good profits and cash flows also helped by the hike in chip production prices for its clients.

Royston Roche, Equity Analyst at the I/O Fund, contributed to this article.

Please note: The I/O Fund conducts research and draws conclusions for the Fund’s positions. We then share that information with our readers. This is not a guarantee of a stock’s performance. Please consult your personal financial advisor before buying any stock in the companies mentioned in this analysis.