Semiconductor companies make integrated circuits of the sort you might find in your smartphone. They make memory chips, microprocessors, and so on. But just because you use cell phones every day doesn’t mean investing in the types of technology underpinning mobile devices is a smart idea, or is it?
The smart answer is “sometimes.” The decision of whether to invest in a company is as much about your personal investment goals, tolerance for risk, and portfolio composition as it is about whether a stock is a good investment.
In this article, we examine the semiconductor industry as a whole and compare two semiconductor stocks: NVIDIA and Cypress Semiconductor.
Let’s get started by looking at the Philadelphia Semiconductor Index.
Which Stocks are in the Philadelphia Semiconductor Index?
The Philadelphia Semiconductor Index (PHLX) includes 30 companies. Each one has to be a member of the industry, have a market capitalization of $100 million or more, and have traded 1.5 million shares every month for the past six months. While many companies fit these basic criteria, only the top 30 by market capitalization are included in the index.
The following stocks are included in the PHLX, presented in alphabetical order by stock ticker:
1. AMD: Advanced Micro Devices, Inc.
2. ADI: Analog Devices, Inc.
3. AMAT: Applied Materials, Inc.
4. ASML: ASML Holding N.V.
5. AVGO: Broadcom, Inc.
6. CREE: Cree, Inc.
7. CY: Cypress Semiconductor Corporation
8. ENTG: Entegris, Inc.
9. IDTI: Integrated Device Technology, Inc.
10. INTC: Intel Corporation
11. KLAC: KLA-Tencor Corporation
12. LRCX: Lam Research Corporation
13. MRVL: Marvell Technology Group Ltd
14. MXIM: Maxim Integrated Products Inc.
15. MLNX: Mellanox Technologies, Ltd.
16. MCHP: Microchip Technology Inc.
17. MU: Micron Technology, Inc.
18. MKSI: MKS Instruments, Inc.
19. MPWR: Monolithic Power Systems, Inc.
20. NVDA: NVIDIA Corporation
21. NXPI: NXP Semiconductors NV
22. ON: ON Semiconductor Corp
23. QRVO: Qorvo, Inc.
24. QCOM: QUALCOMM, Inc.
25. SLAB: Silicon Laboratories
26. SWKS: Skyworks Solutions, Inc.
27. TSM: Taiwan Semiconductor Manufacturing
28. TER: Teradyne, Inc.
29. TXN: Texas Instruments Incorporated
30. XLNX: Xilinx, Inc.
Looking over the PHLX list, you will probably see a few names that are familiar to you – and some that are not. Before we start discussing specific stocks, let’s go over some of the pros and cons of investing in this space.
Pros and Cons of Buying Semiconductor Stocks
The rule of thumb in the semiconductor industry is smaller, cheaper, and faster. Chipmakers race to reduce sizes to pack more processing power and storage into an ever smaller footprint. Faster chips speeds is great for consumers but investors need to be wary because chip prices are known to fall faster than lead balloons from skyscrapers!
In addition, the semiconductor industry is cyclical and even small changes in supply and demand can lead to drastic changes in price.
A slowdown in the pace of replacement for computers or mobile devices will show in a semiconductor company’s bottom line.
Semi companies are also vulnerable to being scooped technology-wise or being forced to cut prices to remain competitive.
Plus, these companies have to deliver goods on-time or risk losing their contracts. There is always the threat of a new development or a competitor with a more efficient supply chain.
With those risks in mind, let’s take a look at two of the best known semiconductor companies and seeing if they deserve your investment dollars.
Is NVIDIA Worth Buying?
NVIDIA’s claim to fame is the invention of the GPU.
It impacted PC gaming, computer graphics, and parallel computing. Today, NVIDIA GPUs are incorporating deep learning and AI to do even more. They have applications in the robotics industry and even in self-driving cars.
In the past few years, NVIDIA has posted jaw-dropping performance returns and there are reasons to be encouraged.
NVIDIA beat analyst estimates at the end of 2017 by generating earnings per share by 56 cents, coming in at $1.72 per share.
The company also posted revenue of $2.91 billion – that’s 34% higher year over year.
Gaming, which is more than half of NVIDIA’s business, still grew by 30% while Datacenter, one of its newer segments, came in at 105% year-over-year.
Also, NVIDIA’s GPU-approach to deep learning is the favored approach to the technology, meaning this stock could have some room to run.
However, NVIDIA does have some serious competition. Advanced Micro Devices [AMD] has been stealing market share and it could gain ground soon. AMD is planning on launching a 7-nanometer chip in 2019. Intel is also talking about dropping its own graphics card by 2020.
Is Cypress Semiconductor Worth Buying?
Cypress is in the digital memory and connectivity business. Its products are mostly used in the automotive and industrial equipment industries. Some its offerings include: Bluetooth chips, Wi-Fi connectivity, and touchscreen controllers.
Cypress also supplies chips for the Amazon Echo as well as Apple X’s charging technology and Nintendo.
Early in its history, Cypress was largely-focused on making the same semiconductor products as everyone else. But these days the company is in the process of shedding that skin to develop a reputation as a specialty chipmaker.
Share prices of Cypress Semiconductor have historically been volatile.
Looking at its share price over the past year, the $5.2 billion market cap company has gone from $14.16 to $18.87.
The company has strong revenue potential. Its gross profit for 2017 was $963.3 million compared to $685.1 million in the previous year.
One of the reasons to believe that this trend can hold on is the fact that none of its customers account for more than 10% of its revenue.
Also, its product portfolio is just as diverse.
Cypress is the largest provider worldwide for seven product categories. That’s huge because the company is not dependent on a single customer or product and as such, is diversified against changes in demand.
Which is better: NVIDIA or Cypress?
Both NVIDIA and Cypress have lots to offer. Which is better depends on your investing goals. Can your portfolio tolerate some volatility with a chance for major upside or do you want a long-term play from an industry leader?
NVIDIA is a seasoned company with its finger on the pulse of the AI market and strong growth. Some of that is priced into the stock valuation – it is currently trading at 37 times its earnings – but there are plenty of reasons to be bullish on NVIDIA.
In contrast, Cypress is priced low. It is currently trading at 15 times its earnings. The company’s earnings have been strong and its strategy to differentiate itself while diversifying is nothing short of smart. Big things could be in store for this company.
Choose your own adventure.