1 Semiconductor Growth Stock Set to Crush the Market This Year

The semiconductor industry is responsible for producing the advanced computer chips which power our most prized consumer electronics. They're in everything from our smartphones to the cars we drive, and in 2021 the industry was one of the best performing sectors with the iShares Semiconductor ETF (SOXX 2.09%), returning 44%. By comparison, the broad S&P 500 stock market index returned 26.9% for the year.

The strong gains were generated thanks to soaring demand, which was met with crippling supply shortages caused by pandemic-related production shutdowns across Asia and Europe. These two factors led to higher semiconductor prices, greater profits, and fresh investments in expanding manufacturing capacity for the future. 

Semiconductor-service company Cohu (COHU 3.03%) was a big beneficiary of the industry's growth in 2021, and it's also set for a strong 2022. One Wall Street analyst firm thinks its stock could double from here, which would blow away the expected return of the broader market. Here's why.

Image source: Getty Images.

Shifting to the automotive segment

Cohu offers a unique, and critical, line of products and services designed for semiconductor producers. It specializes in testing and handling equipment made to identify defects during the fabrication process and post-production, to ensure the chips are fit for real-world use. The company's equipment serves multiple segments including computing, consumer goods, industrial technologies, and automotive.

The automotive segment is the most interesting right now because that industry as a whole has been hit hard by the ongoing semiconductor shortages. Carmakers, in many cases, have been forced to cut back production for a lack of these important components, and some dealer lots in the U.S. have reported an 80% collapse in inventories as a result. Naturally, this sent car prices soaring, with many consumers facing long wait times to purchase the vehicle they want. 

Cohu, therefore, shifted its focus toward the automotive segment, which has grown to become its largest, representing 20% of total revenue. The company's Neon inspection and handling platform is designed to process wafer-level chips as tiny as 0.2 millimeters by 0.4 millimeters in size, at speed. without compromising efficiency. Semiconductors of this variety are crucial to automotive applications, and Cohu says the Neon system helped the company win new customers throughout 2021.

Semiconductor supply issues are expected to persist throughout 2022, and that means producers might continue to expand capacity, requiring more of Cohu's equipment to do so. 

Robust financial performance

On the back of broad semiconductor industry strength, 2022 is set to be one of the most profitable years in Cohu's history, lagging only slightly behind 2021. Both revenue and earnings are expected to contract by about 2% this year compared to 2021 estimates, which should be formalized when the company reports its fourth-quarter results on Feb. 10. However, both metrics are expected to remain at highly elevated levels.

Data source: Cohu, Yahoo! Finance. CAGR = Compound Annual Growth Rate.

But Cohu expects strong operational performance over the next three to five years. It recently revised its yearly revenue target upward to at least $1 billion per year, expecting a 26% CAGR over the next five years. And it set an annual earnings target of $4 per share.

From an investment standpoint, based on 2022 analyst estimates of $2.95 in earnings per share, its stock trades at a forward price-to-earnings multiple of 11. For context, that's a 62% discount to the iShares Semiconductor ETF, which trades at a current multiple of 29.4. In basic terms, Cohu is trading at a far cheaper price than its peers in the semiconductor industry. 

Wall Street is on board

Cohu stock currently trades around $30 a share, and Wall Street firm Rosenblatt Securities has given it a $65 price target, representing 116% upside from here. But it's not alone, with six other analysts holding a buy rating on Cohu, and just one analyst recommending a sell. Their average price target is $46.71, which is nearly 56% higher than where it trades today. 

By comparison, analysts are expecting the broad S&P 500 index to return just 9.6% for 2022, which means adding Cohu to your portfolio could help you beat the market. 

But there is scope for Cohu to do even better, especially if semiconductor shortages persist or grow worse this year. However, over the long run, consumer products will continue to trend toward digitization, which will bolster demand for advanced computer chips. That's very good news for Cohu's investors.