What do your smartphone, your TV, your new car, and even your favorite gaming console have in common? They're powered by advanced computer chips, commercially known as semiconductors. The presence of these critical hardware components continues to expand as more consumer products come with digital capabilities, and that's a big opportunity for investors. By some estimates, the chip industry could be worth over $1 trillion annually within the next decade.
Cohu (COHU -1.57%) is a semiconductor-service company that provides equipment and services to the world's largest chip producers, helping them expand capacity and improve their processes to meet soaring demand. Cohu stock is a bargain right now amid the broader tech sell-off which has sent the Nasdaq-100 index 31% lower year to date, so here's why it might be time to buy in.
Cohu is adapting and thriving
Cohu manufactures testing and handling equipment for the chip production process. It plays a crucial role in ensuring semiconductors meet quality standards throughout fabrication, which increases output and ensures the end-user gets a product that performs as intended.
Cohu is weaving advanced technology like artificial intelligence (AI) into its defect detection capabilities, which can identify faults in chips as small as five micrometers, and quickly distinguishes between harmless cosmetic issues and true, structural defects. As is the nature of AI, it can learn over time and improve in both speed and accuracy.
The company has proven its ability to pivot to quickly meet the changing needs of its chipmaking customers. During the worst of the pandemic, there was a crippling supply shortage of semiconductors designed for new cars, and Cohu was able to shift its focus to that segment, which became its largest source of revenue in 2021.
Beyond the automotive segment, Cohu also operates in other key markets like consumer electronics, computing, and even mobility, which captures 5G-related technologies.
Cohu is breaking records
As of the first quarter of 2022, Cohu reported that it had the largest backlog of orders in its history, which is a big indication that demand for its equipment is still remarkably high. That piece of information is telling because it comes on the back of a record annual revenue result in 2021.
But in the face of rising interest rates and a potential economic slowdown, analysts predict Cohu's revenue will fall slightly in 2022 and 2023. However, there are two things to consider. The first is the company's mid-term projection, where it expects an average of $1 billion in annual revenue over the next three to five years, indicating 2022 and 2023 might be better than analysts think.
The second thing is the estimated growth in the broader semiconductor industry. If it's to reach a $1 trillion annual value by 2032, it needs to grow consistently at just over 9% each year between now and then. For the industry to continue growing, producers will need Cohu's equipment to gradually expand capacity, which means Cohu should grow in lockstep.
Cohu's price drop is an opportunity for investors
Cohu's stock is trading as though analysts will be correct in their prediction of a revenue plateau in 2022 and 2023. The stock is down 49% from its all-time high, but that's also partly due to the broader market sell-off.
But what if instead, Cohu's projections turn out to be more accurate and the company inches closer to $1 billion in revenue this year, and in 2023? That could give the stock a major boost from its currently beaten-down level.
Not to mention, Cohu also delivered record-high profitability in 2021 with a net income of $167 million, or $3.45 per diluted share. Along with management's target of $1 billion in annual revenue, it expects an average of $4 in earnings in each of the next three to five years.
Using that $4 per share target as a guide, Cohu stock trades at a forward price-to-earnings multiple of just 6.4. For context, that's a 70% discount to the broader tech market represented by the Nasdaq-100, which trades at a forward multiple of 22. It implies that Cohu stock would need to triple just to catch up.
But the question is whether Cohu's targets come to life, or whether analysts have nailed their call for a slowdown. With a record order backlog and semiconductors powering more electronics than ever before, there's a good chance it's the former.
