Advanced Micro Devices (AMD -2.60%) has been an incredible turnaround story. Under the guidance of CEO Lisa Su, AMD has made a comeback from chip industry underdog to technological leader. The stock is up over 1,570% over the last five years, capped off by a 17% run higher in the last month alone on the back of stellar second-quarter 2021 earnings.
AMD could have plenty left in the tank in the years ahead, but it isn't the only great chip stock benefiting from record demand for tech hardware. Three cheaper stocks worth a look right now are Skyworks Solutions (SWKS -1.80%), Micron Technologies (MU -4.55%), and Kulicke and Soffa (KLIC -3.04%).
A connectivity chip leader, and now a whole lot more
Nicholas Rossolillo (Skyworks Solutions): Skyworks Solutions is a leader in providing radio frequency and related circuitry that enables smartphones and other devices to connect to mobile networks and Wi-Fi. Most notably, Skyworks has strong ties to Apple (AAPL -2.63%), with the iPhone maker comprising some half of revenue. Given the mobility boom of the 2010s, it was a fantastic market to be a supplier for. Skyworks' stock rose about 1,200% since the start of 2010.
But Skyworks has been hard at work diversifying its business outside of smartphones (what it calls "broad markets," about one-third of total sales). It's about to get a big boost in this department because it just acquired the automotive and infrastructure business of Silicon Labs (SLAB -2.33%) for $2.75 billion in cash. This purchase helps the connectivity specialist enter new markets, including electric and hybrid vehicle component design, industrial equipment, and wireless network infrastructure.
Management says the deal will immediately add to the company's already robust profitability, making this an even stronger chip designer as demand for advanced circuitry spreads across the economy. And while Skyworks integrates the takeover from Silicon Labs into its own operation, the smartphone business is doing just fine thanks to the massive upgrade cycle kicked off by 5G mobile. During the last quarter (the three months ended July 2, 2021), Skyworks' total revenue rose 51% year over year to $1.12 billion, and adjusted net income was up 70% to $359 million.
After the latest quarterly update, Skyworks Solutions shares trade for a reasonable 28 times trailing-12-month free cash flow, less than half of what AMD is trading for after the latter's sharp run higher in recent weeks. Full disclosure: I have a stake in both semiconductor companies and think they have a bright future. However, Skyworks looks like an especially good long-term value right now as it rides the 5G wave and uses its highly profitable business to expand in new directions.
Micron is the best of both worlds
Anders Bylund (Micron Technology): Memory chip specialist Micron Technology has a long history of trading at single-digit price-to-earnings ratios and looking like a bargain-bin value investment. That started to change just before the coronavirus pandemic turned everything upside down -- and the low P/E ratio also continued to rise during the health crisis.
I understand if you're scratching your head right now. Why would I recommend buying Micron shares right after the stock finally reached a reasonable valuation? The stock has gained a market-beating 60% over the last 52 weeks. Surely these aren't the bargain-priced stubs you were looking for.
Fortunately, Micron's strong returns didn't spring from a vacuum. The stock is on the rise for good reason, and Micron can now be treated as a stable value investment for the long haul.
In the recently reported third quarter of 2021, Micron saw 36% year-over-year revenue growth while bottom-line earnings more than doubled. These results were achieved at a time when many semiconductor companies experienced -- and still suffer from -- a global shortage of chip manufacturing capacity. Micron runs its own memory-chip foundries, largely sidestepping the whole shortage situation. Therefore, Micron can capitalize on growing demand for advanced electronics more effectively than most of its sector peers.
From a technology-focused perspective, Micron is on the cutting edge of NAND and DRAM performance and features. From a financial point of view, times are so good that the company has launched a quarterly dividend program for the first time since the mid-1990s. Payouts are a modest $0.10 per share so far, which works out to an annual yield of 0.5% at current stock prices. But management has promised to boost the dividend budget over time in a shareholder-friendly effort to put Micron's excess cash profits to good use.
So we are looking at a solid growth stock here, poised to keep on growing in the middle of a chip-sector recession, and the rising stock comes with a side of generous buybacks plus an interesting dividend policy. It's the best of both worlds, marrying the upside of high-growth investments with the classic profile of an income-generating value stock.
One of the cheapest ways to play the 2020s semi boom
Billy Duberstein (Kulicke and Soffa): Legend has it, those that did the best during the 1850s California gold rush weren't the prospectors, but rather the companies that sold them picks and shovels. That's why one of my favorite ways to play the 2020s semiconductor boom is semiconductor equipment stocks -- those machines that produce today's highly advanced chips.
One of the cheapest stocks in that sector is Kulicke and Soffa. K&S is a leader in wire bonding equipment for advanced packaging, the process that links different chips together with copper wires on printed circuit boards for different applications.
K&S blew away earnings last week, and the stock surged some 14% the following day. Revenue grew a massive 182% over the prior year, and adjusted (non-GAAP) earnings per share of $1.87 beat analyst estimates by a whopping $0.51. And not only that, but management guided to strong sequential growth next quarter as well.
And yet, the stock is still cheap. Merely annualizing last quarter's EPS would put the stock around eight times earnings. Also, K&S has a conservative balance sheet, with about $10 in net cash, around 16% of its market cap. And remember, management has also guided to strong sequential growth next quarter.
So why is the stock so cheap, given the tailwinds in semiconductor production today? Mainly, K&S has a history of being extremely cyclical.
However, given the multiple growth vectors in the industry, from 5G to artificial intelligence to autonomous vehicles and factories, there seems a good chance the semiconductor industry could become more of a stable growth industry this decade relative to its past. On the conference call with analysts, CEO Fusen Chen was optimistic about maintaining the current level of business, saying, "We continue to be amid a period of dramatic capacity expansion throughout the semiconductor industry, which is supported by durable and structurally sustainable end-market trends."
In addition to a booming core business in wire bonding and other back-end assembly equipment, K&S is also growing a new segment in equipment for advanced miniLED displays. Although only garnering $60 million-$80 million this year, Chen sees this revenue growing to $150 million by 2024, with growth beyond that.
So, with a stable and growing core, a new growth segment in miniLED, and a very cheap valuation, Kulicke and Soffa still looks like a great long-term buy, even after its post-earnings surge.