Semiconductor stocks are performing terribly so far in 2022 as the global chip shortage has knocked the wind out of their sails.
The PHLX Semiconductor Sector index has slipped by 21% year to date. Index components such as Applied Materials (AMAT +2.32%) and Qorvo (QRVO +2.27%) have been similarly crushed and the two are down 24% and 28%, respectively, of their value in 2022. Their weak performances aren't surprising as supply chain snarls and the geopolitical instability have led their management teams to temper expectations.
However, both of these semiconductor companies are built for growth, and their stocks could regain their mojo and rise rapidly in a short time, bending upward like the right side of a parabolic curve.
Image source: Getty Images.
1. Applied Materials
Applied Materials -- maker of the equipment that chipmakers use to manufacture chips -- released its fiscal 2022 second-quarter results on May 19, and investors weren't impressed. That's because there were visible signs of a slowdown in its growth. For the three-month period ending May 1, the company's adjusted earnings were up 13% year over year to $1.85 per share on a 12% jump in revenue to $6.25 billion. Those numbers fell short of analysts' consensus expectations.
NASDAQ: AMAT
Key Data Points
Management's guidance points toward a drop in Applied Materials' earnings on a year-over-year basis, and revenue growth is expected to slow down further. The company anticipates $1.77 per share in adjusted earnings this quarter on $6.25 billion in revenue, at the midpoint of its guidance range. It had posted non-GAAP earnings of $1.90 per share on $6.20 billion in revenue in the prior-year period.
However, there's no shortage of demand for Applied Materials' semiconductor manufacturing equipment. This is evident from the growth in the company's order book last quarter. As Chief Financial Officer Brice Hill remarked on the earnings conference call:
We continue to generate strong orders in Q2 in both semi systems and AGS. Our backlog continues to grow, and we have visibility from our customers extending into 2023 and beyond.
It is worth noting that Applied Materials had a record backlog of $8 billion at the end of its fiscal first quarter, and Hill's comments indicate that the backlog may have grown in fiscal Q2. That's not surprising. Demand for wafer fabrication equipment remains robust.
This year, semiconductor foundries are expected to spend $107 billion on the chip-making equipment that Applied Materials sells, which would be an 18% jump over last year. What's more, wafer fabrication equipment spending is expected to exceed $100 billion in 2023 as well, which isn't surprising as foundries are scrambling to increase their manufacturing capacities to meet the booming demand for chips.
The problem is that Applied Material isn't able to secure all the components it needs in the quantities it requires. Moreover, the company isn't able to recognize revenue from machines and tools that it ships to customers in an incomplete state, even if they're only shy one or two parts that will be delivered later. As Applied Materials works through its supply chain challenges and converts more of its backlog into revenue, the company's growth should accelerate.
Analysts expect 14% annualized earnings growth from Applied Materials over the next five years. Meanwhile, the stock is trading at 15 times trailing earnings -- a nice discount to the S&P 500's multiple of 21. Investors should consider buying this potential growth stock on the cheap right now.
2. Qorvo
Qorvo supplies radio-frequency modules to smartphone manufacturers such as Apple (AAPL +2.62%) and Samsung, which puts the company in a nice position to take advantage of the rapidly growing 5G smartphone market.
NASDAQ: QRVO
Key Data Points
The company released its fiscal 2022 fourth-quarter results on May 4, reporting a 16% increase in annual revenue to $4.65 billion. Apple was the key driver of Qorvo's growth -- it accounted for a third of its total revenue during the period, which ended April 2. Samsung was the next largest customer with 11% of the top line.
Samsung and Apple are the top two smartphone vendors globally, accounting for 42% of shipments in the first quarter, according to Strategy Analytics. What's more, Samsung dominates the Android 5G smartphone market with a 24% share, according to Counterpoint Research. Apple, on the other hand, reportedly ended 2021 with a 31% share of the total 5G smartphone space.
According to Statista, last year, there were 664 million 5G mobile subscriptions across the globe, and its researchers forecast that number will rise to 4.39 billion in 2027. So demand for Qorvo's RF modules -- which are critical to the functioning of 5G smartphones -- should continue to increase. More importantly, 5G smartphones use more RF modules than previous generations of handsets.
According to Driehaus Capital Management, the radio frequency front end (RFFE) content in a 5G smartphone is worth $21 -- a huge jump over the $8.99 worth of RFFE modules in a 4G device. As a result of the expanding use of 5G, the size of the 5G RFFE market could hit $12.4 billion in 2023 as compared to $8.4 billion last year.
Qorvo has been gaining share at Samsung and has been a supplier to Apple since the iPhone 3G. So, it should be able to capture a nice chunk of the incremental revenue opportunity from the two smartphone giants. What's more, investors can buy this 5G stock for just 12 times earnings right now. Considering that the secular growth opportunity it is sitting on could supercharge the stock, that valuation looks like a steal.
