The chip market might be able to breathe a sigh of relief, at least temporarily, after the U.S. and China agreed to a cease-fire and to return to the negotiation table to discuss a possible end to the ongoing trade war. President Trump also announced that U.S. firms will once again be able to work with Huawei.
The S&P 500, Nasdaq, and the Dow all hit new highs heading into the 4th of July holiday after the highly anticipated G-20 summit went about as well as many on Wall Street might have hoped. Semiconductor firms have been impacted by the trade war between the world’s two largest economies and the Huawei ban.
While uncertainty is likely to remain, Micron MU stock got a boost after it reported its earnings results on June 25. The firm said it had already resumed some business with the Chinese telecommunication powerhouse. The Wall Street Journal also reported at the time that Qualcomm QCOM and Intel INTC had both resumed shipments of products to Huawei.
Despite some of the recent positivity, many headwinds remain in the historically cyclical semiconductor industry. Chip firms big and small are beholden to their customers’ product cycles, capital investments, and more. On top of that, chip oversupply can hurt pricing power, as is currently the case for some firms.
Despite some of the current headwinds, the industry looks poised to remain highly valuable within the larger technological revolution. Semiconductor companies are poised to help drive forward the growth of the Internet of Things, artificial intelligence, autonomous vehicles, and much more. And it won’t just be the likes of Tesla TSLA, Apple AAPL, Microsoft MSFT, Google GOOGL, and Amazon AMZN that are set to turn big profits and see their stocks climb as these industries expand.
Therefore, a return to growth is likely on the horizon for the semiconductor industry as a whole, even if some face rough near-term outlooks. So, let’s take a look at three Zacks buy-ranked semiconductor stocks to consider for July and beyond.
1. MagnaChip Semiconductor Corporation MX
MagnaChip designs and manufactures analog and mixed-signal semiconductor platform solutions for Internet of Things applications, industrial and automotive applications, and much more. Shares of MX have soared from $6.65 per share in early January to open trading Friday at $10.20. Some of MagnaChip’s recent gains come after the firm updated its Q2 fiscal 2019 guidance in early June. The company upped its revenue projection from a range of $173 to $181 million, up to “at least” $194 million. Meanwhile, the firm expects its gross profit margin to hit at least 21%, instead of its previous 16% to 18% guidance. MX raised its guidance on the back of better-than-projected revenue for both its OLED Display drivers and 8" Foundry services.
The firm, which is expected to release its Q2 financial results on July 30, is currently a Zacks Rank #2 (Buy) that also sports an “A” grade for Momentum in our Style Scores system. Our current Zacks Consensus Estimate calls for MagnaChip’s full-year fiscal 2019 revenue to climb 1.4%, while many in the broader chip market face massive downturns. Peeking further ahead, the company’s fiscal 2020 revenue is projected to climb 8.4% higher than our current year estimate, with adjusted earnings expected to bounce back from an expected loss of $0.29 per share in 2019 to +$1.05 in 2020. And despite its strong first half of 2019, MX’s price/sales ratio of 0.47 represents a significant discount compared to its industry’s 5.0.
2. Amtech Systems, Inc. ASYS
Amtech manufactures capital equipment from silicon wafer handling automation to thermal processing used in fabricating semiconductor devices, LEDs, silicon carbide, and solar cells. ASYS shares have popped roughly 30% in 2019 but still rest firmly below $10 after opening Friday at $5.75 per share. This low price tag might deter some investors. But along with its ‘cheap’ price, Amtech’s price/sales ratio of 0.68 comes in well below its industry’s 1.7 average to help it rock a “B” grade for Value in our Style Scores system.
Amtech is a Zacks Rank #1 (Strong Buy) at the moment on the back of recent positive, longer-term earnings estimate revision activity for fiscal 2019 and 2020. More specifically, ASYS consensus earnings estimates have jumped significantly on these revisions, with its current year estimate up from a projected loss of -$0.56 per share to +$0.07. Amtech has also crushed our quarterly earnings estimates in the trailing two quarters, by 133% and 50%, respectively. Investors should note that on June 28 ASYS announced the sale of its SoLayTec business “as the first step in the previously announced plan to divest substantially all of its solar segment.”
3. Applied Materials, Inc. AMAT
Applied Materials stock is up roughly 38% in 2019 from $32.04 to Friday’s opening price of $44.24 a share. The semiconductor equipment maker is coming off a better-than-projected second quarter of fiscal 2019. On top of that, news broke on July 1 that Applied Materials is set to acquire Kokusai Electric Corp. for $2.2 billion. Like AMAT, Kokusai produces machines used to make semiconductors, which is part of the reason Applied Materials executives expect the acquisition to be immediately accretive to its adjusted earnings per share.
Looking ahead, Applied Materials is projected to see its adjusted fiscal 2019 earnings fall 33% from 2018 on the back of a 16% revenue decline. However, the company’s 2020 revenues are projected to jump 8.5% above our current-year estimate to help lift earnings 18.4% higher than 2019. Plus, these estimates could climb higher based on Kokusai Electric’s expected impact. Applied Materials has also seen its earnings estimate revision activity trend heavily in the right direction recently, especially for fiscal 2019 and 2020. This positivity helps AMAT earn a Zacks Rank #2 (Buy). Applied Materials also boasts an “A” grade for Value and is a dividend payer with a yield of 1.88% at the moment.
