1 Semiconductor Stock with 40% Upside

Best Semiconductor Stock To Buy? Society’s increasing reliance on semiconductor technology has become a central feature of modern life, with even mundane appliances such as fridge-freezers having their own online presence via the Internet-of-Things. In fact, the semiconductor industry is now a linchpin component of the world we inhabit today.

For instance, many of the popular consumer goods we take for granted – smartphones, TVs and digital cameras – wouldn’t be able to function without the help of these powerful chips, and as demand grows with the rise of new products like quantum batteries and electric vehicles, the sector is poised for even greater expansion.
Indeed, some industry watchers believe the semiconductor space could be worth up to $1 trillion annually within the next ten years.
These developing trends have obviously brought about substantial tailwinds for a firm like Cohu, whose role as a market leader in the semiconductor test and inspection space has grown more important of late.
And while the global supply chain crisis has caused havoc for other companies around the world, the scarcity factor has only worked to make chip manufacturing firms more profitable.
The challenging macroeconomic environment has been a boon for Cohu (COHU), as semiconductor companies ramp up production in the face of ongoing shortages.
As a matter of fact, a quick look at Cohu’s revenue growth over the past five years proves this observation rather neatly. The firm has expanded its top-line in four out of the last five years, and, not only that, but its growth rate has actually been accelerating too, going from 25.0% in 2017 to 39.5% in 2021.

COHU Is Not Your Run of the Mill Semi Firm

Cohu isn’t your typical semiconductor firm.
The company doesn’t make or design chips in the same way that, say, AMD or Nvidia would; instead, the business has positioned itself as a specialist in the testing and inspection sector, a crucial element in the semiconductor manufacturing process.
The scope of Cohu’s available market opportunity appears immense. The firm serves a wide variety of markets, including the automotive, medical, consumer, and mobile communications industries to name but a few. This gives Cohu a diverse revenue mix, as its quality assurance expertise is required by pretty much all chip makers in every field.
Cohu’s largest segments during the first quarter 2022 were its mobile and automotive sectors, from which it generated a combined 30% of its $198 million in total sales. The firm’s biggest revenue fraction came in the form of its recurring business, where it managed a non-GAAP gross margin of roughly 52%.
Source: Unsplash

Cohu’s Valuation Metrics Are Phenomenal Right Now

Along with most other technology stocks this year, Cohu’s share price is down significantly since the start of 2022. The company has lost 31% of its value over the last five months, and trades currently at around $27 a piece. It’s still a long way off its all-time high of just over $50, which it set back in February 2021.
Despite its underwhelming price action, Cohu just reported a decent set of earnings results for the first quarter of its fiscal year 2022.
The company surprised Wall Street consensus makers on both its top and bottom line, delivering a GAAP EPS of $0.44, beating expectations by a full $0.14. Similarly, the firm’s revenue of $197.8 million also outperformed analysts’ predictions, even though it was down 12.3% on a year-by-year comparison.

Investors will be especially pleased to see the company’s profitability measures continue to rise. For instance, its trailing twelve month net income margin is a sector busting 19%, while its EBITDA margin is also high at 20% as well.
Furthermore, Cohu’s price-to-book ratio continues to fall, with its current multiple sitting close to its 5 year low at just 1.49 times. To put this into perspective, the firm’s same metric was double that in April of last year, suggesting that Cohu is entering value territory right now.
Indeed, it’s not just the company’s price-to-book ratio that makes the business look like a steal at the moment. Cohu’s Piotroski score* of 8 is exceptionally high, and implies the firm has its financial house in order.
*The Piotroski score is a measurement of various factors that rank the financial health of a business, and takes a discrete value between zero and nine. Points are added depending on how a company performs on profitability, liquidity, leverage and operating efficiency, helping investors identify stocks that are currently weak or strong.


Although Cohu occupies a relatively niche position in the industry, there are still quite a few peers with which to compare it.
One of these is Ultra Clean Holdings, Inc., another high-end analytical services company in the semiconductor space, whose market cap of $1.5 billion is in the same ballpark as COHU’s $1.4 billion.

By lining them up against each other, you can see that COHU’s TTM GAAP P/E ratio of 8.31 – without doubt one of the best for any firm in the IT sector – is far and away superior to UCTT’s multiple of 11.4.
And given that both companies are almost equally priced when it comes to stock value right now, it’s apparent that Cohu has around 40% upside on its industry rival.

Is Now The Right Time To Buy COHU?

The bull thesis for Cohu is fairly straightforward.
The company is a leader in its field, with a valuation that most investors couldn’t possibly resist. Its share price has had a pretty miserable year so far, despite the firm consistently beating its earnings expectations for at least the last four quarters.
The business is healthy – as attested to by its outstanding Piotroski score – and there’s actually very few stocks like it at the moment.
So yes, if you’ve got the room for it on your portfolio, Cohu is a solid buy.

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