Semiconductors are the silicon backbone of the digital revolution. Compute-intensive AI workloads are also priming them for the next wave of secular growth, so it’s no wonder the industry has outperformed the market over the past six months, delivering returns of 125% compared to 8.9% for the S&P 500.
Nevertheless, a cautious approach is imperative because Moore’s Law (a principle stating that computer productivity doubles every two years) will eventually make even the most impactful technologies today obsolete. On that note, here are three semiconductor stocks we’re steering clear of.
Texas Instruments (TXN)
Market Cap: $270.4 billion
Headquartered in Dallas, Texas since the 1950s, Texas Instruments (NASDAQ:TXN) is the world’s largest producer of analog semiconductors.
Why Are We Wary of TXN?
-
Annual sales growth of 3.6% over the last five years lagged behind its semiconductor peers as its large revenue base made it difficult to generate incremental demand
-
Efficiency has decreased over the last five years as its operating margin fell by 15.3 percentage points
-
10.4 percentage point decline in its free cash flow margin over the last five years reflects the company’s increased investments to defend its market position
At $322.99 per share, Texas Instruments trades at 36.6x forward P/E. Check out our free in-depth research report to learn more about why TXN doesn’t pass our bar.
Vishay Intertechnology (VSH)
Market Cap: $7.98 billion
Named after the founder’s ancestral village in present-day Lithuania, Vishay Intertechnology (NYSE:VSH) manufactures simple chips and electronic components that are building blocks of virtually all types of electronic devices.
Why Do We Avoid VSH?
-
Annual sales declines of 1.3% for the past two years show its products and services struggled to connect with the market during this cycle
-
Earnings per share fell by 51.9% annually over the last five years while its revenue grew, showing its incremental sales were much less profitable
-
Cash-burning history and the downward spiral in its margin profile make us wonder if it has a viable business model
Vishay Intertechnology is trading at $64.90 per share, or 2.2x forward price-to-sales. If you’re considering VSH for your portfolio, see our FREE research report to learn more.
Photronics (PLAB)
Market Cap: $1.81 billion
Sporting a global footprint of facilities, Photronics (NASDAQ:PLAB) is a manufacturer of photomasks, templates used to transfer patterns onto semiconductor wafers.
Why Does PLAB Give Us Pause?
-
Sales tumbled by 1.4% annually over the last two years, showing market trends are working against it during this cycle
-
Estimated sales growth of 1.8% for the next 12 months is soft and implies weaker demand
-
Competitive supply chain dynamics and steep production costs are reflected in its low gross margin of 35%
