In a world where even our refrigerators can have an internet connection, the semiconductor industry is of crucial importance to just about every manufacturer of electronic goods.
Popular consumer products like smartphones and TVs couldn't function without these advanced computer chips, and as demand soars from emerging technologies like electric vehicles, the semiconductor industry is poised for even greater growth. In fact, estimates suggest the market for semiconductors could be worth $1 trillion annually in a decade.
This presents a significant opportunity for chipmakers, but also for semiconductor manufacturer service companies like Cohu (COHU -1.57%). And that's part of why one Wall Street firm thinks Cohu stock could soar 67% over the next 12 to 18 months.
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Small, but mighty
Cohu doesn't produce any semiconductors itself. Instead, it makes testing and handling equipment crucial to the manufacturing process. The company has a market valuation of just $1.3 billion right now, and it commands less attention than some of the industry darlings like Advanced Micro Devices or Nvidia. But that lack of attention presents an opportunity for investors who are willing to venture away from the mainstream names.
Quality assurance is extremely important to the chipmaking process, and that's where Cohu's defect-detection equipment shines. It's designed to inspect and handle semiconductors at high speed to maintain efficiency, and it even supports chips as small as 0.2 millimeters by 0.4 millimeters. These can be used for automotive purposes as the list of digital features in cars continues to expand.
The automotive segment is Cohu's largest, representing 17% of the company's total revenue at the end of 2021. But its equipment serves chipmakers in a range of other segments, including mobility (5G), medical applications, consumer electronics, and computing. In addition, the company offers comprehensive training programs for manufacturers either on-site, or in Cohu's facilities in the U.S., Europe, and Asia.
The company has experienced extraordinary growth in the last year in particular as semiconductor shortages have prompted manufacturers to expand their production, requiring more of Cohu's equipment.
Record financial performance
2021 was Cohu's first profitable year since 2017, and it beat all expectations. It delivered $3.45 in earnings per share (EPS), which was 14% higher than the $3.01 analysts were estimating. The company has spent the last few years investing in its business, and it appears to be paying off.
The 2021 earnings result came on the back of record-high revenue of $887 million, with growth rapidly accelerating by 39% compared to 2020 sales of $636 million, which expanded by 9% over 2019.
The strong year prompted Cohu to revise its midterm financial targets higher. Over the next three to five years, the company says it now expects to average $1 billion in annual revenue with $4 in EPS. On the sales side, that would be a significant increase in the company's current rolling three-year average of $702 million.
Part of this growth will be attributable to Cohu's foray into new areas like software through its DI-core data analytics platform. It's designed to help manufacturers monitor, diagnose, and generate reports from their Cohu equipment. This should help producers with preventative maintenance, avoiding potentially costly shutdowns.
Wall Street is on board
There is no doubt that Cohu has been a beneficiary amid the pandemic environment, as semiconductor production shutdowns have triggered worldwide shortages. Producers have been racing to expand capacity to meet demand, giving Cohu a lift in sales, and to the company's credit, it appears to have executed flawlessly.
As everyday technology continues to evolve, more-advanced computer chips will likely be required. Cars are a great example: A full suite of digital entertainment, sensors, and comfort enhancements that didn't exist a couple of decades ago are now required. Trends like these will drive demand for Cohu's equipment over the long term.
Wall Street firm Rosenblatt Securities thinks Cohu stock could rise to $45 a share, which represents a 67% upside from where it trades today. But that might be conservative because, according to the company's 2021 results, it trades at a price-to-earnings multiple of just 7.8 at the moment.
That's a 68% discount to the iShares Semiconductor ETF, which trades at a multiple of 24. It implies Cohu stock would need to triple just to trade in line with its peers in the industry. As I mentioned earlier, Cohu doesn't get as much attention as the more glamorous names in the sector, but there's still plenty of potential upside on the table for patient investors.
