Please ensure Javascript is enabled for purposes of website accessibility

Why It's Time to Buy This Semiconductor Service Company

By Anthony Di Pizio - Jun 23, 2021 at 5:12AM

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More

Cohu is delivering essential tools and services to semiconductor manufacturers as they race to fill demand backlogs.

The COVID-19 pandemic triggered supply chain disruptions in most manufacturing-based industries. The effects have persisted in 2021, but few have been as consequential to global commerce as the shortage in semiconductors. The lack of supply has driven rising prices and falling inventories in small devices like smartphones and big-ticket items like cars -- which are now more reliant on advanced computer chips than ever before. 

The backlogged demand has led to major upside in the share prices of most semiconductor producers, but there may still be opportunities to join the action. Cohu (COHU -0.40%) is a California-based service company that supplies a portfolio of necessary testing equipment and services to semiconductor manufacturers. At just three times trailing-12-month revenue, this stock could be of great value as companies race to expand their production capacity. 

Engineers in a semiconductor testing facility work with a machine.

Image source: Getty Images

The business of services

Computing is growing more advanced and becoming more and more a part of our everyday lives -- today, some refrigerators even offer digital screens and internet connectivity. Manufacturing the components that drive these capabilities can be incredibly complex, and most companies are unable to fulfill all of their needs in house. Cohu fills an important gap here, not just providing essential equipment but also over 20 training courses for employees, offered across America, Asia, and Europe.

While Cohu reports sales under two key segments -- semiconductor test and inspection, and printed circuit board (PCB) tests -- it serves a broad variety of markets. These include:  

  • Automotive (autonomous driving, electrification, safety)
  • Computing and network (datacenter and cloud)
  • Consumer electronics (TVs, gaming, wearables)
  • Optoelectronics (LiDAR, LED, connectivity)
  • Industrial and medical (automation, remote security, medical ICs)
  • Mobility (5G to mmWave, power management, application processors)

As cars trend more toward electrification, Cohu has developed specialties in autonomous driving, infotainment, and the electric drivetrain. It offers testing, handling, and interface solutions for the components that drive all of those features. The company has the ability to run extensive tests on the ever-growing number of sensors on modern day vehicles, putting them through stringent environmental circumstances to ensure they perform in the real world. 

Improving financial performance

Cohu is losing money, and has been for the last three years -- it hasn't turned a full-year profit since earning $1.14 per share in 2017. However, since then, it has grown its revenue by over 80%. The recent losses stem from a more than doubling in research and development (R&D) expenses since 2017, and a near-doubling in sales, general, and administrative (SG&A) costs over the same period.

It indicates the company has invested aggressively in growth, and it appears to be paying off as losses are quickly narrowing. In fact, in the fourth quarter of 2020, Cohu generated $0.35 per share in earnings, and $0.61 in the first quarter of 2021 -- so the profits have just started to flow.





Q1 2021

Revenue (millions)





Earnings per share





Data source: Company filings. 

While the PCB test segment accounted for just 2% of revenue in 2018, it grew to over 8% in 2020, offering a potential high-growth opportunity for Cohu -- off a low base too, as it contributed about $50 million last year. 

According to Yahoo! Finance, seven analysts who cover the stock predict Cohu will earn $3.17 per share for the full year 2021, which means it currently trades at less than 11 times those earnings. This is incredibly cheap compared to the iShares PHLX Semiconductor ETF, which trades at over 38 times earnings. 

Cohu's sales are growing fastest in Taiwan, rising 234% since 2018. It's followed by the U.S. (up 77%) and China (up 58%) over the same period. Heavy reliance on China and Taiwan isn't ideal at the moment, as geopolitical tensions are simmering. This could pose a risk to the company at some point in the future, if there is an escalation. However, its base of operations remains in the U.S., which should protect it against the more serious potential consequences. 

Looking forward

The semiconductor shortage is likely to persist for the rest of this year and possibly into 2022. Manufacturers will probably need to continue expanding capacity to deliver more products, which means more of Cohu's offerings will be in demand. 

Based on analysts expectations, and early Q1 2021 results, the company is set for a really big year. With a market cap of just $1.6 billion, it trades at just about two times 2020 revenue -- and with potential revenue over $900 million this year, that multiple could shrink substantially. 

Investors are presented with an extremely cheap stock compared to the broader sector, in an industry that has booming demand and potential multi-year backlogs. Cohu is definitely a company worth considering adding to your portfolio. 

Anthony Di Pizio has no position in any of the stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.

Invest Smarter with The Motley Fool

Join Over 1 Million Premium Members Receiving…

  • New Stock Picks Each Month
  • Detailed Analysis of Companies
  • Model Portfolios
  • Live Streaming During Market Hours
  • And Much More
Get Started Now

Stocks Mentioned

Cohu, Inc. Stock Quote
Cohu, Inc.
$30.22 (-0.40%) $0.12

*Average returns of all recommendations since inception. Cost basis and return based on previous market day close.

Related Articles

Motley Fool Returns

Motley Fool Stock Advisor

Market-beating stocks from our award-winning analyst team.

Stock Advisor Returns
S&P 500 Returns

Calculated by average return of all stock recommendations since inception of the Stock Advisor service in February of 2002. Returns as of 08/16/2022.

Discounted offers are only available to new members. Stock Advisor list price is $199 per year.

Premium Investing Services

Invest better with The Motley Fool. Get stock recommendations, portfolio guidance, and more from The Motley Fool's premium services.