1 Semiconductor Stock With Over 100% Upside, According to Wall Street

The S&P 500 has officially doubled since hitting its pandemic low point in March 2020, capping off the strongest bull market in recent memory. As it keeps powering to new highs, you might be wondering if it's still possible to find a bargain.

Good value can appear thanks to fundamental shifts in particular industries, favoring the companies that operate within them. Cohu (COHU +2.98%) is a great example -- it supplies crucial testing and handling equipment to the world's largest semiconductor producers, and amid the global chip shortage, it's reaping big rewards.

Wall Street firm Rosenblatt Securities describes the semiconductor industry as being in the "mother of all cycles," and its analyst thinks Cohu could rise over 100% from current levels.

Image source: Getty Images.

An essential piece of the machine

The pandemic caused havoc for many global supply chains as manufacturing facilities were closed down for months at a time to curb COVID-19 outbreaks. The ripple effects are still being felt in the semiconductor industry as persistent supply shortages were met with simultaneous surges in demand.

The automotive industry is one of the main culprits. As our cars get smarter, they require more advanced computer chips to power the important sensors and digital features. Since many car manufacturers have been unable to secure sufficient supply of these key semiconductors, new car dealers are faced with almost empty car lots.

Such a shortage can only mean higher prices for consumers and price distortions in other markets like used cars.

But semiconductor service powerhouse Cohu has ramped up its business to help curb further negative impacts from the crippling shortages. It recently placed a particular focus on its Neon inspection system, which is a high-speed handler for chips as small as 0.2 mm by 0.4 mm. These are commonly used for automotive purposes, among other applications.

In the fiscal second quarter, the automotive segment was actually Cohu's largest, representing 18% of total revenue. It was followed by the mobility segment (5G and wireless technologies) and the consumer segment (electronics and gaming applications).

The increasing demand for Cohu's equipment prompted Rosenblatt Securities to initiate coverage on the stock earlier this year with a buy rating and a price target of $65 per share.

Strong financial performance

Rosenblatt expects Cohu to generate $1.92 in earnings per share in the current quarter, which is far higher than the analyst consensus of $0.69. It might be close to the mark since the company has returned to profitability this year with accelerating growth after spending the last few years investing in its business. 

Data source: Cohu. Estimates from Yahoo! Finance. CAGR = compound annual growth rate.

With $903 million in revenue expected for fiscal 2021 and a current market capitalization of $1.56 billion, Cohu stock trades at just 1.7 times sales. But since it should be profitable this year, investors can apply a price-to-earnings multiple as well. 

With a share price of $31.74 as of this writing and estimated earnings of $3.04, that multiple is currently 10.4. Is that cheap? Well, the iShares Semiconductor ETF trades at 35 times earnings, which means when you compare Cohu to its peers in the semiconductor industry, it looks extremely attractive. 

But Cohu is on track to possibly exceed both revenue and earnings expectations this year based on first-half results.

Data source: Cohu.

The adjusted earnings per share above excludes one-time benefits from the sale of Cohu's printed circuit board test business, a small part of the overall company. If the effects of that sale are included, the earnings figures are even higher. 

A triple-digit increase looks completely realistic

If Cohu reaches Rosenblatt's price target of $65, it would still only be trading at 21 times fiscal 2021 earnings. That's still a big discount to the iShares Semiconductor ETF and many of the industry's large producers.

According to the Semiconductor Industry Association, global semiconductor sales are expected to grow 19.7% this year to over $527 billion. While sales are expected to slow to 8.8% in 2022, that might be indicative of persistent shortages, which many industry participants are currently warning will happen.

If semiconductor sales are growing, then Cohu's unique testing and handling equipment will continue to be in high demand. And if supply constraints continue, many producers might seek to expand capacity further -- another win for Cohu.

If there's a bargain to be had when the broader markets are near all time highs, this small-cap stock might be it.