During an age where we can browse the internet on our refrigerators, semiconductors have become the single most important manufacturing component in a growing number of industries. 

But the pandemic triggered a global shortage of semiconductors, crippling the production of many consumer goods including big-ticket items like cars. The supply constraints have caused prices to rise materially, and major automakers expect that to continue well into 2022.

The semiconductor shortage spells opportunity for semiconductor-service powerhouse Cohu (COHU -3.30%), which is already delivering soaring growth. Wall Street firm Rosenblatt Securities thinks the stock could rise 97% from current levels. 

A person inspects semiconductor machinery.

Image source: Getty Images.

Cohu has a growing opportunity

While the semiconductor supply constraints are hitting consumers' wallets, they've allowed semiconductor producers to charge higher prices and increase profit margins. Investors have noticed this trend, sending the iShares Semiconductor ETF 69% higher this year -- far outpacing its five-year average return of 38% per year. 

These producers are in the process of expanding their manufacturing capacity to alleviate constraints and meet growing demand, and that's where Cohu stands to benefit. As a provider of critical semiconductor testing and handling equipment, in addition to training and education services for manufacturers, Cohu is an essential part of that equation. 

The automotive sector is a core focus for the entire semiconductor industry right now because it's having the most significant economic impact on consumers. According to the most recent survey of consumer sentiment by the University of Michigan, just 38% of consumers thought it was a good time to purchase a car -- the lowest reading in 12 months. 

It's because major brands like Toyota, Ford Motor Company, and Volkswagen are producing fewer new cars, specifically because they can't get the chips they need. As a result, dealerships in the U.S. have seen a collapse in new vehicle inventories, falling as much as 80% in some cases. Used car prices are soaring because people are forced into that market instead. 

Aligning the company's focus with the broader semiconductor industry, Cohu's automotive segment has grown to become 18% of overall revenue, making it the company's largest. The semiconductor market size for this one segment alone should surpass $50 billion in 2021, so Cohu's strategic shift could reap big rewards. 

Accelerating revenue growth, and a return to profitability

Cohu has grown its revenue by a respectable 26% compound annual rate since 2016, so it has a bankable track record of operating performance. But there's a clear uplift so far this year thanks to the semiconductor shortage, as its customers race to buy more of its equipment and services.


First Half 2020

First Half 2021



$283 million

$470 million


Data source: Cohu.

Cohu attributes the above-trend growth to its line of specialized automotive-related testing and handling equipment, which it says continues to attract new customers. The company's Neon inspection system is one of the main drivers. It inspects and handles chips as small as 0.2 mm to 0.4 mm -- which are often found in vehicles -- at very high speeds without compromising defect detection or efficiency.

Cohu's growth hasn't flowed to the bottom line since 2017, though. The company spent 2018 to 2020 making losses, as it invested in its business to drive the growth we're seeing today. The company is set to return to profitability this year, already delivering $1.79 in adjusted earnings per share in the first half. Analysts expect that number to grow to $3.05 for the full year.

The stock is a great value compared to its peers

Cohu's stock trades at a forward price-to-earnings ratio of just 11, using this year's expected $3.05 in earnings per share, and a current stock price of $33. By comparison, the iShares Semiconductor exchange-traded fund trades at over 35 times, so Cohu's stock would need to more than triple to align with the valuation of its peers.

But the story doesn't end in 2021. Analysts predict 2022 will bring at least $3 in earnings per share as well, and there could be some upside to that given some large car makers expect semiconductor shortages to continue well into the new year.

It's possible Cohu becomes a more prominent part of the industry over the long term, because even after the supply constraints are resolved, consumer goods will only grow more hungry for advanced computer processing power in the future.

That opportunity goes hand in hand with the U.S. government's commitment to have more companies build semiconductor manufacturing facilities domestically. It gives Cohu some home-field advantage for a change since the majority of its revenue is currently made in Asia.

In retrospect, the $65 price target ascribed by Rosenblatt Securities might prove to be conservative for long-term investors.