The next few weeks are crucial for the semiconductor industry as major chipmakers are slated to report their financial results. The start of the period has been disappointing though, with leading Austrian chipmaker, AMS AG, issuing a weak operating margin projection.
Additionally, last week, Taiwan Semiconductor Manufacturing Company TSM posted lower-than-expected first-quarter earnings and gave a weak guidance for the second quarter. However, all is not lost for semiconductor industry as some of its major sub-industries’ earnings growth projection for the current year are above the broader S&P 500.
So it could be an excellent idea to invest in semiconductor stocks that are likely to outperform their respective earnings and revenues estimates.
Strong Y-o-Y Semiconductor Sales Growth Boost Hope
AMS has announced that its fiscal second quarter sales will decline by $220-$250 million, while its operating margin will come in at a negative 20-25%. Additionally, Taiwan Semi projected revenues between $7.8 billion and $7.9 billion for the second quarter, lower than the Zacks Consensus Estimate of $8.51 billion. (Read More: Taiwan Semi Q1 Earnings Lag Estimates, Revenues Up Y/Y)
On the positive side, according to the Semiconductor Industry Association (SIA), global semiconductor sales were $36.8 billion in the month of February, up 21% year over year. President and CEO of SIA, John Neuffer said the global semiconductor market has witnessed “substantial and consistent growth in February,” after posting year-over-year sales increases for 19 straight months.
The major contributor to this strong year-over-year sales growth in February was the Americas, which witnessed a year-over-year increase of 37.7% to $8.26 billion in February. Given below are the other key contributors:
Yearly Sales Growth
| Market | February 2017 (Billion $) | February 2018 (Billion $) | % Change |
| Europe | 2.82 | 3.43 | 21.7% |
| Japan | 2.75 | 3.18 | 15.5% |
| China | 10.05 | 11.70 | 16.4% |
| Asia Pacific/All Other | 8.77 | 10.19 | 16.2% |
Earnings Growth Prospects Remain Upbeat
The tech sector’s earnings performance has been strong over the last many quarters and is expected to maintain this momentum even in this earnings season. Total Q1 earnings for the tech sector are expected to be up 20.9% from the same period last year on 11.5% higher revenues. This would follow 24.2% earnings growth for the sector on 11.1% revenue growth in the preceding quarter. (Read: Can Tech Earnings Live Up to Expectations?)
Coming to one of its key sub-industries, Semiconductor Equipment – Wafer Fabrication projected its earnings growth of around 30.11%, which is significantly higher than that of the S&P 500’s figure of 17.06%. Additionally, each of its five stocks has reported earnings beat in the first quarter.
Of the other such key sub-industries, Semiconductor – Communications expects earnings growth of 35.29%, while Semiconductor – General projects earnings growth of 20.14%. Both industries’ earnings growth forecasts are better than the S&P 500.
Our Choices
Semiconductor stocks have been battered on several fronts this year, the latest being by the poor outlook from Taiwan Semiconductor and AMS. However, several concerns surrounding the industry are unlikely to be a headache even in the medium term, with some of its key sub-industries posting encouraging earnings growth projections.
Earnings ESP is our proprietary methodology for identifying stocks that have high chances of surprising with their next earnings announcement. It shows the percentage difference between the Most Accurate estimate and the Zacks Consensus Estimate. You can uncover the best stocks to buy or sell before they’re reported with our Earnings ESP Filter.
You could further narrow down the list of choices by looking at stocks that have a favorable Zacks Rank #1 (Strong Buy), 2 (Buy) or 3 (Hold). You can see the complete list of today’s Zacks #1 Rank stocks here.
Our research shows that for stocks with this combination, the chance of a positive earnings surprise is quite high.
Silicon Motion Technology Corporation SIMO is a designer of semiconductor solutions for the mobile storage and mobile communications markets all over the globe.
This Kowloon-based company has beaten the Zacks Consensus Estimate for the last four consecutive quarters, with an average positive earnings surprise of 6.7%.
Silicon Motion Technology has an Earnings ESP of +4.62% and a Zacks Rank of 2.
The company is expected to report first-quarter results on Apr 26 after market close.
Microchip Technology Incorporated MCHP is a developer of semiconductor products for a variety of embedded control applications.
This Arizona-based company has surpassed the Zacks Consensus Estimate for the last four consecutive quarters, with an average positive earnings surprise of 5.3%.
It has an Earnings ESP of +0.15% and a Zacks Rank of 2 this time around.
The company is expected to report first-quarter results on May 8.
Advanced Micro Devices, Inc. AMD is a global semiconductor company that have two segments, enterprise, embedded and semi-custom, and computing and graphics.
This California-based company has beaten the Zacks Consensus Estimate for the last four consecutive quarters, with an average positive earnings surprise of 35%.
Advanced Micro has an Earnings ESP of +1.96% and a Zacks Rank of 3.
The company is expected to report first-quarter results on Apr 25 after market close.
FormFactor, Inc. FORM is a designer of probe cards, analytical probes, probe stations, integrated measurement systems, thermal sub-systems and reliability test systems.
This California-based company has beaten the Zacks Consensus earnings estimate for the last four consecutive quarters with an average positive earnings surprise of 13.7%.
Powered with the right combination of the two key ingredients – an Earnings ESP of +16.13% and a Zacks Rank of 3 – our proven model shows that an earnings beat is expected for FormFactor in the to-be-reported quarter as well.
The company is expected to report first-quarter 2018 results on May 2 after the market close.
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