Bright Near-Term Outlook For Semi Communications Industry

The Zacks Semiconductor – Communications industry primarily comprises companies that provide integrated circuits, which are used in storage, network computing as well as connectivity devices. The industry participants primarily cater to end markets that constitute consumer, mobile, desktop, automotive, industrial, communications, IoT, wearable devices and others.

Here are the industry’s three major themes:

• IoT is fast gaining market traction and bringing about fundamental changes in business models. It is advancing on the back of cloud storage and the growing interconnectedness of things. The increasing use of IoT solutions in retail and transportation industries, and in the development of connected smart cities is driving the growth of this industry.
  
• Another factor driving this industry’s growth is the expanding automotive market, which continues to gain traction on increasing consumer demand for added technology, features in new vehicles, and transition to hybrid and electric vehicles. The increased need for safety and infotainment requirements in this markets hould continue to drive demand for semiconductors.
  
• Majority of the industry participants depend on China for their growth, particularly in the areas of automotive and industrial automation, as well as semiconductor applications. The entire space, which derives a sizable portion of its revenues from this region, is tottering from the ongoing U.S.-China trade dispute.

Zacks Industry Rank Indicates Solid Prospects

The Zacks Semiconductor – Communications industry is housed within the broader Zacks Computer and Technology sector. It carries a Zacks Industry Rank #110, which places it at the top 43% of more than 250 Zacks industries.

The group’s Zacks Industry Rank, which is basically the average of the Zacks Rank of all the member stocks, indicates encouraging near-term prospects.

Before we present a few stocks that you may want to consider for your portfolio, let’s take a look at the industry’s recent stock-market performance and valuation picture.

Industry Outperforms S&P 500 & Sector

The Zacks Semiconductor – Communications industry has outperformed the Zacks S&P 500 composite, and the broader Zacks Computer and Technology Sector over the past year.

The industry has gained 26% over this period compared with the S&P 500’s rise of 7.4% and the broader sector’s return of 4.3%.

One-Year Price Performance

Industry’s Current Valuation

On the basis of forward 12-month price-to-earnings ratio, which is a commonly used multiple for valuing Semiconductor – Communications stocks, the industry is currently trading at 31.98X versus the S&P 500’s 17.07X and the sector’s 19.76X.

Over the past five years, the industry has traded as high as 37.25X, as low as 13.64X and recorded a median of 21.05X, as shown in the charts below.

Price-to-Earnings (P/E) Ratio (F1)

Price-to-Earnings (P/E) Ratio (F1)

Bottom Line

Growing adoption of IoT, smartphones, storage solutions, networking and connectivity solutions, including Wi-Fi as well as Wi-Fi/Bluetooth integrated SOCs, and the need for high-speed data in both communications networks and data centers bodes well for the industry participants. Strong demand for analog integrated circles (ICs) should continue to drive the industry’s growth.

None of the stocks in the Zacks Semiconductor – Communications industry flaunts a Zacks Rank #1 (Strong Buy). However, we present a stock that has a Zacks Rank #2 (Buy) and is well positioned to outperform the market. You can see the complete list of today’s Zacks #1 Rank stocks here.

Cypress Semiconductor Corporation (CY), an original equipment manufacturer (OEM) of digital and mixed-signal integrated circuits (ICs), has gained 35.2% over the past year. The company, which currently carries a Zacks Rank #2, came up with an average four-quarter positive earnings surprise of 9.40%.

Price and Consensus: CY

Moreover, here are two stocks with a Zacks Rank #3 (Hold) that investors may currently hold on to.

DSP Group, Inc. (DSPG), a fabless semiconductor company offering advanced chip-set solutions for a variety of applications, has gained 22.2% over the past year. The company, which currently carries a Zacks Rank #3, came up with an average four-quarter positive earnings surprise of 230.2%.

Price and Consensus: DSPG

NeoPhotonics Corporation (NPTN), a manufacture of photonic integrated circuit or PIC based modules and subsystems for bandwidth-intensive, high-speed communications networks, has lost 33.1% over the past year. The company, which currently holds a Zacks Rank #3, delivered an average four-quarter positive earnings surprise of 3.94%.

Price and Consensus: NPTN

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