The pandemic drove an incredibly strong period for the semiconductor industry, which produces the advanced computer chips that power most modern-day electronics. It was somewhat counterintuitive given the slowdown in the global economy, but with more products and services rapidly trending toward digitization, demand for chips continued to soar.
At the same time, supplies were short due to lockdowns across Europe and Asia that halted production for months at a time. It led to the perfect environment for chip companies that were able to raise prices and generate record profits.
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Estimates suggest the sector could surpass $1 trillion in annual value within the next 10 years. It's not only about the big semiconductor producers that have grown into household names, but also the smaller service companies that provide crucial equipment and expertise that make the industry run. Here are two under-the-radar opportunities investors should consider.
The case for Cohu
With a market valuation of just $1.4 billion, Cohu (COHU 3.03%) is a minnow of the semiconductor industry that doesn't receive a great deal of attention. But it punches above its weight with respect to its contribution to some of the largest chip producers in the world, providing testing and handling equipment crucial to the manufacturing process.
Cohu's equipment is highly specialized, with the ability to inspect wafer chips with dimensions as small as 0.2 millimeters by 0.4 millimeters, and it handles them at speed so as not to slow production.
Inspecting for defects is a crucial part of the production process to ensure the end-user receives a working product. Cohu has implemented highly advanced technology like artificial intelligence to detect cracks as tiny as 5 micrometers, and it's smart enough to identify the difference between structural and cosmetic issues.
The company serves chipmakers operating in a variety of segments like computing, consumer electronics, mobility (5G), and even automotive. The automotive segment was Cohu's largest segment by revenue in 2021 and therefore a big driver of growth, as digital features inside new vehicles become more advanced -- not to mention the growing adoption of electric vehicles (EVs), which demand more processing power.
Cohu generated $197 million in revenue during the first quarter, but that was actually a contraction compared to the $225 million it delivered in the first quarter of 2021. Revenue still remains significantly elevated from pre-pandemic levels, however, and the company has a record-high order backlog, which could take several quarters to clear. That bodes well for growth.
Cohu is highly profitable with $2.97 in adjusted trailing-12-month earnings per share (EPS). Its stock price has fallen 40% from its all-time high amid the broader tech sell-off, placing it at an attractive price-to-earnings multiple of just 10. That's cheaper than the Nasdaq-100 index's multiple of 26, so this might be a dip worth buying.
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The case for Axcelis Technologies
Like Cohu, Axcelis Technologies (ACLS 0.29%) is considered a small-cap stock. It has a market valuation of $2 billion, and it's coming off a blockbuster first-quarter result where it also reported a significant order backlog, setting it up for strong growth. The company makes ion implantation equipment for semiconductor producers, which fulfills a key part of the fabrication process.
Axcelis has delivered a series of announcements to the market over the last several months, highlighting important shipments of its equipment to both new and existing customers. It had particular success recently with producers of DRAM semiconductors, commonly known as memory chips, which is a segment of the market with some exciting innovations. These chips are in hot demand for EV applications in addition to the continued rollout of the 5G mobile network (5G-enabled devices can demand 50% more memory than older 4G models).
It's showing up in the company's financial results. While many businesses are experiencing a slowdown in sales, Axcelis delivered $203 million in revenue during the first quarter, which represented a whopping 53% growth year over year. The company also recorded a gross profit margin of 44.1%, which expanded from 42.5% in the first quarter of 2021.
It helped drive Axcelis' EPS to $1.22, 154% higher than the year-ago result.
Its order backlog now sits at $625 million, the highest level in its history, and it has given the company confidence that it could generate up to $850 million in revenue in 2022, a whole year ahead of its original schedule. It would be a solid 28% growth rate over its 2021 result, and it would set another all-time high.
The company has recorded a trailing-12-month EPS of $3.63, which places Axcelis stock at a 36% discount to the Nasdaq-100 based on a price-to-earnings multiple of 16.6. Since it could be gearing up for one of its strongest years yet, it might be a good idea to start building a position in Axcelis stock.
