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 40.1% compared to 13.1% for the S&P 500.
Although these businesses have produced results lately, investors should tread carefully as not all companies are equipped for the next technological innovation. With that said, here are three semiconductor stocks we’re passing on.
Lattice Semiconductor (LSCC)
Market Cap: $10.4 billion
A global leader in its category, Lattice Semiconductor (NASDAQ: LSCC) is a semiconductor designer specializing in customer-programmable chips that enhance CPU performance for intensive tasks such as machine learning.
Why Does LSCC Worry Us?
- Annual sales declines of 18.4% for the past two years show its products and services struggled to connect with the market during this cycle
- Costs have risen faster than its revenue over the last five years, causing its operating margin to decline by 18.8 percentage points
- Earnings growth over the last five years fell short of the peer group average as its EPS only increased by 5.5% annually
At $75.61 per share, Lattice Semiconductor trades at 55.2x forward P/E. Dive into our free research report to see why there are better opportunities than LSCC.
Amkor (AMKR)
Market Cap: $10.85 billion
Operating through a largely Asian facility footprint, Amkor Technologies (NASDAQ: AMKR) provides outsourced packaging and testing for semiconductors.
Why Are We Hesitant About AMKR?
- Gross margin of 14.2% reflects its high production costs
- Performance over the past five years shows its incremental sales were less profitable as its earnings per share were flat
- Low free cash flow margin of 5.1% for the last two years gives it little breathing room, constraining its ability to self-fund growth or return capital to shareholders
Amkor’s stock price of $43.79 implies a valuation ratio of 28.7x forward P/E. If you’re considering AMKR for your portfolio, see our FREE research report to learn more.
IPG Photonics (IPGP)
Market Cap: $3.28 billion
Both a designer and manufacturer of its products, IPG Photonics (NASDAQ: IPGP) is a provider of high-performance fiber lasers used for cutting, welding, and processing raw materials.
Why Should You Dump IPGP?
- Sales tumbled by 3.8% annually over the last five years, showing market trends are working against its favor during this cycle
- Earnings per share decreased by more than its revenue over the last five years, showing each sale was less profitable
- Capital intensity has ramped up over the last five years as its free cash flow margin decreased by 15.1 percentage points
IPG Photonics is trading at $78.56 per share, or 56.6x forward P/E. To fully understand why you should be careful with IPGP, check out our full research report (it’s free for active Edge members).
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