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This analog/mixed signal semiconductor market as a whole should continue to strengthen through year-end, as inventories in the computing and smartphone markets (two of the biggest chip consumers) were worked down in second-half 2023 and industrial inventories were worked down in the first half of 2024.
The World Semiconductor Trade Statistics (WSTS), which supplies data to the Semiconductor Industry Association (SIA), is projecting double-digit growth in semiconductors this year on the back of a 76.8% jump in memory demand and a 10.7% increase in logic demand. Discrete, sensors, optoelectronics and analog are expected to see single-digit declines. The Americas and Asia, posting strong double-digit growth, will drive demand, Europe is expected to barely hold its own while Japan declines.
For the analog/mixed signal group, the going is likely to be less smooth. That’s because many of these players have increased their exposure to auto and industrial markets, where design wins have more shelf life. The industrial end market is sluggish, notwithstanding the fact that growth prospects over the next 5-10 years remain excellent, because of the adoption of new technologies like AI-ML, EVs, smart cities, IoT, etc.
While companies remain cautious regarding macro and geopolitical developments, the latest results indicate that we are past the trough in this cycle. We are keeping our eyes on Magnachip Semiconductor (MX - Free Report) and Analog Devices (ADI - Free Report) .
About the Industry
The electronic gadgets we use to accurately read our commands, and record, store, retrieve and process the information we throw at them run on semiconductor technology, whether analog (enabling the recording and measurement of real-world information), digital (processing information available in machine-readable language) or mixed signal (enabling conversion of analog signals to digital or digital to analog, among other things). Most electronic gadgets use a combination of these components, whether in consumer, industrial, auto, medical, communications or IoT and other markets.
The industry is cyclical and prices are elastic. Players usually serve multiple markets that offset their individual seasonality, or focus on certain core markets for which they have highly differentiated technology and relationships.
Growth Prospects Tempered by Macro and Geopolitics
The semiconductor market is expected to post strong growth this year. Gartner estimates that revenue growth will be 17.4% in 2024, as memory comes off a very bad 2023 amid weak demand that led to an inventory glut. With memory bouncing 70.5%, that situation will turn around. The non-memory segment will grow 6.2% -- not too bad considering that world economies are not in a very good place this year. The return to growth in the analog/mixed signal market is reflected in end-market demand. PCs have been weak for a while now (Gartner estimates that this year, growth will be facilitated by on-device AI. IDC estimates that the commercial refresh will stretch out to 2025 when Windows 10 support ends.) Smartphone growth is expected to accelerate this year on the back of higher-end AI phones and resurgent Chinese players (4% growth in 2024 and 2.3% CAGR for the next five years, according to IDC). Overall, TechInsights forecasts automotive chip demand growth of 13.2% in 2024. Between 2024 and 2028, auto chip demand and revenue are expected to grow at an average CAGR of 11.8% and 12.4%, respectively. IoT, cloud and defense are other fast-growing segments. AI is likely to remain a big driver across multiple end markets. According to Gartner, AI chips will grow 33% this year, with 47% of total AI chip revenue coming from the PC market. By 2026-end, all enterprise PC purchases will be AI PCs. Only 5% of companies were using generative AI in 2023, which will grow to 80% by 2026. Technological innovation in the form of the metaverse, digital health, EVs and other innovative transportation, and sustainability considerations are secular drivers. Uncertainties related to dealing with China remain.
While companies have started benefiting from declining channel inventory in the industrial end-market, macro and geopolitical uncertainty remains. The high interest rate in the U.S. is leading to lower investment at manufacturing companies and depressing employment numbers. Both ISM and S&P Global are reporting the sharpest PMI contraction in July. Even if the interest rate comes down in the remaining months of the year, its unlikely that the industry will snap back immediately. Therefore, this year is likely to remain weak for this end market, with the possibility of improvement next year, if interest rates recede as broadly expected.
In general, semiconductor pricing is robust when capacity is tight and utilization high. However, companies start adding capacity when they anticipate the next big growth cycle which usually continues for several years. AI is the main driver of the current build cycle and significant capacity is being built up today because it will have to suffice for years to come. While new fab construction, often supported by government initiatives, and their equipping is necessary to drive future growth, it brings additional capacity online, which is a negative for near-term pricing.
An emerging issue that semiconductor players are particularly exposed to is geopolitical tensions. The semiconductor supply chain is globally distributed, which means that international relations need to be maintained to ensure that work continues without disruption. While the Russia-Ukraine war didn’t have that much of an impact, the souring of relations between the U.S. and China is another story. If China really tries to take control of Taiwan as many experts expect it will, there could be a terrible war that will be highly disruptive of the global economy and especially of the chip sector. That’s because a leading share of advanced node chips are made on the island. Another geopolitical concern is the increasing awareness among all leading nations of the larger role that semiconductors are playing in AI-driven electronic weaponry and surveillance mechanisms. As the importance of semiconductors in defense grows, the rebalancing of the semiconductor supply chain to onshore or near-shore production also increases. The CHIPS Act may resolve imbalances arising out of increased capacity depressing prices as U.S. production increases costs. In the meantime, U.S. restrictions on trading with China remains a headwind for some.
Zacks Industry Rank Indicates Dismal Prospects
The Zacks Semiconductor – Analog and Mixed industry is housed within the broader Zacks Computer and Technology sector. It carries a Zacks Industry Rank #220, which places it in the bottom 12% of the 250-odd Zacks-classified industries. The group’s Zacks Industry Rank, which is basically the average of the Zacks Rank of all the member stocks, indicates weak near-term prospects.
Our research shows that the top 50% of the Zacks-ranked industries outperforms the bottom 50% by a factor of more than 2 to 1. The industry’s positioning in the bottom 50% of Zacks-ranked industries is based on the earnings outlook for the constituent companies in aggregate. Looking at the aggregate earnings estimate revisions over the past year, we see that analyst opinion about the outlook for both 2024 and 2025 has materially deteriorated, and particularly since July 2023. Overall, the 2024 estimates have dropped 32% over the past year, while the 2025 estimates have dropped 27.7%.
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.
Stock Market Performance
The Semiconductor – Analog and Mixed industry currently trades at a discount to both the broader Zacks Computer and Technology sector and the S&P 500. Further, it appears that since the start of this year, it has leveled with the S&P 500 at times, but always traded at a much lower multiple than the sector.
Overall, the industry gained 18.3% over the past year while the broader sector gained 30.3% and the S&P 500 24.9%.
One-Year Price Performance
Image Source: Zacks Investment Research
Industry's Current Valuation
On the basis of forward 12-month price-to-earnings (P/E) ratio, the industry is trading at a 29.1X multiple, which is a premium to the S&P 500’s 21.7X and a discount to the broader computer and technology sector’s 26.1X. At the current level, it is also trading at a premium to its median level of 26.7X over the past year.
The industry has traded between the 15.9X and 29.1X multiples over the past year.
Forward 12 Month Price-to-Earnings (P/E) Ratio
Image Source: Zacks Investment Research
2 Stocks to Keep an Eye On
Given the deterioration in the outlook, there are currently no buy-ranked stocks in the sector. However, a couple of stocks with good long-term potential may be worth looking at:
Analog Devices, Inc. (ADI - Free Report) : Norwood, MA-based Analog Devices is an original equipment manufacturer of analog, mixed signal and digital signal processing (DSP) integrated circuits, including amplifies, converters, CODECs, embedded processing products, DSPs, MEMS and temperature sensors, thermal management products, RF/IF components, filters and processors. it has direct sales offices, sales representatives and distributors in more than 50 countries worldwide.
The company is well positioned for the long term with its product development, customer engagement, manufacturing capacity and balance sheet strength. Although economic and geopolitical factors will continue to impact the rate of recovery, the above-expectation results in the last quarter including the order momentum across end markets and improving customer inventories point to early signs of a cyclical recovery. The difficulty in predicting macro conditions keeps us on the sidelines.
Analog Devices beat earnings estimates by 5.3% in the third quarter, with fiscal 2024 (ending October) estimates increasing 9 cents (1.4%) and 2025 estimates dropping 53 cents (6.6%) in the last 30 days. The 2024 estimate is up 11 cents (1.8%) from 90 days ago.. While revenue and earnings for 2024 are expected to decline a respective 23.8% and 37.3%, they’re expected to grow 9.6% and 18.6% in the following year.
ADI shares, ranked #3, have appreciated 28.7% in the past year.
Price and Consensus: ADI
Image Source: Zacks Investment Research
Magnachip Semiconductor Corp. (MX - Free Report) : Cheongju, South Korea-based Magnachip Semiconductor designs and manufactures analog and mixed-signal semiconductor platform solutions for consumer, computing and industrial (including IoT and automotive) electronics OEMs, ODMs and EMS companies, as well as subsystem designers in Korea, the Asia Pacific, the U.S. and Europe. The company sells its products through a direct sales force, as well as through a network of agents and distributors.
The bulk of revenue comes from its Power Solutions business, which returned to growth in the last quarter as leaner channel inventories, seasonality and new products helped turn the business around. The improvement was across industrial, communication and consumer markets. The auto market also rebounded with new design wins in both China and Japan. Solar prospects also improved. The strength in the display business came from China smartphones, European autos and improved demand for power chips used in OLED IT panels and LED TVs. The phase-out of Transitional Foundry Services will negatively impact revenue this year. The new product innovation, design win momentum and lower inventories again appear to be signaling a cyclical recovery, as tempered by continued uncertainty related to macro and geopolitical tensions.
The company’s earnings beat the Zacks Consensus Estimate by 34.4% in the last quarter. The loss estimate for 2024 consequently declined 14 cents (12.6%) while that for 2025 remained steady in the last 90 days. Analysts expect that in 2024, the company’s top and bottom lines will decline 1.2% and 76.4%. For 2025, they will increase a respective 16.7% and 13.4%.
#3 (Hold) ranked Magnachip’s shares are down 42.4% over the past year.
Price and Consensus: MX
Image Source: Zacks Investment Research
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Macro, Geopolitics Limit 2024 Semiconductor Growth: 2 Stocks
This analog/mixed signal semiconductor market as a whole should continue to strengthen through year-end, as inventories in the computing and smartphone markets (two of the biggest chip consumers) were worked down in second-half 2023 and industrial inventories were worked down in the first half of 2024.
The World Semiconductor Trade Statistics (WSTS), which supplies data to the Semiconductor Industry Association (SIA), is projecting double-digit growth in semiconductors this year on the back of a 76.8% jump in memory demand and a 10.7% increase in logic demand. Discrete, sensors, optoelectronics and analog are expected to see single-digit declines. The Americas and Asia, posting strong double-digit growth, will drive demand, Europe is expected to barely hold its own while Japan declines.
For the analog/mixed signal group, the going is likely to be less smooth. That’s because many of these players have increased their exposure to auto and industrial markets, where design wins have more shelf life. The industrial end market is sluggish, notwithstanding the fact that growth prospects over the next 5-10 years remain excellent, because of the adoption of new technologies like AI-ML, EVs, smart cities, IoT, etc.
While companies remain cautious regarding macro and geopolitical developments, the latest results indicate that we are past the trough in this cycle. We are keeping our eyes on Magnachip Semiconductor (MX - Free Report) and Analog Devices (ADI - Free Report) .
About the Industry
The electronic gadgets we use to accurately read our commands, and record, store, retrieve and process the information we throw at them run on semiconductor technology, whether analog (enabling the recording and measurement of real-world information), digital (processing information available in machine-readable language) or mixed signal (enabling conversion of analog signals to digital or digital to analog, among other things). Most electronic gadgets use a combination of these components, whether in consumer, industrial, auto, medical, communications or IoT and other markets.
The industry is cyclical and prices are elastic. Players usually serve multiple markets that offset their individual seasonality, or focus on certain core markets for which they have highly differentiated technology and relationships.
Growth Prospects Tempered by Macro and Geopolitics
Zacks Industry Rank Indicates Dismal Prospects
The Zacks Semiconductor – Analog and Mixed industry is housed within the broader Zacks Computer and Technology sector. It carries a Zacks Industry Rank #220, which places it in the bottom 12% of the 250-odd Zacks-classified industries. The group’s Zacks Industry Rank, which is basically the average of the Zacks Rank of all the member stocks, indicates weak near-term prospects.
Our research shows that the top 50% of the Zacks-ranked industries outperforms the bottom 50% by a factor of more than 2 to 1. The industry’s positioning in the bottom 50% of Zacks-ranked industries is based on the earnings outlook for the constituent companies in aggregate. Looking at the aggregate earnings estimate revisions over the past year, we see that analyst opinion about the outlook for both 2024 and 2025 has materially deteriorated, and particularly since July 2023. Overall, the 2024 estimates have dropped 32% over the past year, while the 2025 estimates have dropped 27.7%.
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.
Stock Market Performance
The Semiconductor – Analog and Mixed industry currently trades at a discount to both the broader Zacks Computer and Technology sector and the S&P 500. Further, it appears that since the start of this year, it has leveled with the S&P 500 at times, but always traded at a much lower multiple than the sector.
Overall, the industry gained 18.3% over the past year while the broader sector gained 30.3% and the S&P 500 24.9%.
One-Year Price Performance
Image Source: Zacks Investment Research
Industry's Current Valuation
On the basis of forward 12-month price-to-earnings (P/E) ratio, the industry is trading at a 29.1X multiple, which is a premium to the S&P 500’s 21.7X and a discount to the broader computer and technology sector’s 26.1X. At the current level, it is also trading at a premium to its median level of 26.7X over the past year.
The industry has traded between the 15.9X and 29.1X multiples over the past year.
Forward 12 Month Price-to-Earnings (P/E) Ratio
Image Source: Zacks Investment Research
2 Stocks to Keep an Eye On
Given the deterioration in the outlook, there are currently no buy-ranked stocks in the sector. However, a couple of stocks with good long-term potential may be worth looking at:
Analog Devices, Inc. (ADI - Free Report) : Norwood, MA-based Analog Devices is an original equipment manufacturer of analog, mixed signal and digital signal processing (DSP) integrated circuits, including amplifies, converters, CODECs, embedded processing products, DSPs, MEMS and temperature sensors, thermal management products, RF/IF components, filters and processors. it has direct sales offices, sales representatives and distributors in more than 50 countries worldwide.
The company is well positioned for the long term with its product development, customer engagement, manufacturing capacity and balance sheet strength. Although economic and geopolitical factors will continue to impact the rate of recovery, the above-expectation results in the last quarter including the order momentum across end markets and improving customer inventories point to early signs of a cyclical recovery. The difficulty in predicting macro conditions keeps us on the sidelines.
Analog Devices beat earnings estimates by 5.3% in the third quarter, with fiscal 2024 (ending October) estimates increasing 9 cents (1.4%) and 2025 estimates dropping 53 cents (6.6%) in the last 30 days. The 2024 estimate is up 11 cents (1.8%) from 90 days ago.. While revenue and earnings for 2024 are expected to decline a respective 23.8% and 37.3%, they’re expected to grow 9.6% and 18.6% in the following year.
ADI shares, ranked #3, have appreciated 28.7% in the past year.
Price and Consensus: ADI
Image Source: Zacks Investment Research
Magnachip Semiconductor Corp. (MX - Free Report) : Cheongju, South Korea-based Magnachip Semiconductor designs and manufactures analog and mixed-signal semiconductor platform solutions for consumer, computing and industrial (including IoT and automotive) electronics OEMs, ODMs and EMS companies, as well as subsystem designers in Korea, the Asia Pacific, the U.S. and Europe. The company sells its products through a direct sales force, as well as through a network of agents and distributors.
The bulk of revenue comes from its Power Solutions business, which returned to growth in the last quarter as leaner channel inventories, seasonality and new products helped turn the business around. The improvement was across industrial, communication and consumer markets. The auto market also rebounded with new design wins in both China and Japan. Solar prospects also improved. The strength in the display business came from China smartphones, European autos and improved demand for power chips used in OLED IT panels and LED TVs. The phase-out of Transitional Foundry Services will negatively impact revenue this year. The new product innovation, design win momentum and lower inventories again appear to be signaling a cyclical recovery, as tempered by continued uncertainty related to macro and geopolitical tensions.
The company’s earnings beat the Zacks Consensus Estimate by 34.4% in the last quarter. The loss estimate for 2024 consequently declined 14 cents (12.6%) while that for 2025 remained steady in the last 90 days. Analysts expect that in 2024, the company’s top and bottom lines will decline 1.2% and 76.4%. For 2025, they will increase a respective 16.7% and 13.4%.
#3 (Hold) ranked Magnachip’s shares are down 42.4% over the past year.
Price and Consensus: MX
Image Source: Zacks Investment Research