Which of These 2 Small-Cap Semiconductor Stocks Is a Better Buy?

The semiconductor market is worth more than $500 billion today. Although there's currently an oversupply of semiconductors used in PCs and smartphones (along with several other headwinds), the industry is projected to grow at an annual rate of over 12% through 2029. Amid the chaos, there are some unique opportunities among semiconductor stocks that should prove fruitful in the long-term if they can overcome the industry's current challenges.

With that said, let's look at two businesses that support the semiconductor industry in unique ways. Each of these companies provides technologies that are essential to semiconductor manufacturing. As such, they should remain a key part of the conversation around semiconductor stocks to buy for years to come.

1. Axcelis Technologies gets a boost from the EV market

Axcelis Technologies (ACLS 4.86%) facilitates chipmakers with ion implantation, a critical step in manufacturing semiconductors. Specifically, Axcelis designs, manufactures, and services custom-tailored "ion implanters," high-precision equipment used to make integrated circuits, otherwise known as semiconductors or microchips.

Semiconductor manufacturers utilize Axcelis equipment for a range of semiconductor applications, from PC memory boards to electric vehicle (EV) sensors. Axcelis' flagship Purion platform helps chipmakers increase productivity and reduce defects in their processes.

The electric vehicle market has proven exceptionally opportune for Axcelis in recent years. According to CEO Mary Puma, the market for Axcelis' automotive and industrial applications has more than doubled in the last three years. During the second quarter, this segment accounted for 84% of all Axcelis system shipments and 95% of system bookings.

While the electrification of the automotive industry has driven significant business growth, increased operating costs -- primarily from supply chain disruptions and higher freight costs -- have hurt profitability. As the company now contends with a marketwide chip shortage, it has been laser-focused on productivity improvements to meet mounting demand.

2. Photronics leads in a growing market

The world's largest manufacturer of photomasks, Photronics (PLAB 4.57%), creates tiny quartz plates found in semiconductors and flat-panel displays (FPDs). The majority of Photronic's sales take place in Asia, but the company generates revenue worldwide with 11 facilities across the globe.

Founded in 1969, Photronics has significantly helped the development of the photomask industry from its inception. Growth in the photomask industry is showing no signs of stopping. In fact, it's anticipated to grow at an annual rate of at least 5.5% through 2028. The broadening use of semiconductors, flat panel displays, touchscreens, and circuit boards is expected to fuel the photomask market growth in the coming years.

Supply chain constraints, intensified by recent lockdowns in China, have caused a significant photomask shortage. This presents a major headwind for Photronics, and the company just lowered its annual guidance as a result, citing a growing backlog of orders and longer lead times. A recent slowdown in Photronics' high-end applications also contributed to the lower guidance figure, although mainstream photomask demand remains strong.

Photronics now looks to ramp up its production capacity as lockdowns ease in China. However, geopolitical tensions remain a risk for the company in the foreseeable future.

Which semiconductor stock is a better buy right now?

Between these two semiconductor stocks, Photronics is currently the better buy than Axcelis. I say this largely because it has a lower price-to-earnings ratio and a lower price-to-sales ratio.

While Photronics is the clear winner in terms of price-to-earnings and price-to-sales ratios, Axcelis is less exposed to weaker segments of the chip industry like smartphones and PCs, which have recently seen a drop in demand. Although demand for chips in industrial and automotive applications has remained strong, Photronics is more susceptible to industry headwinds in the near term.

With a recent oversupply of chips for mobile devices and computers, the semiconductor market could require more correction before it begins to recover. However, mass adoption of new technologies like artificial intelligence, machine learning, and the Internet of Things (IoT) is expected to grow the semiconductor market to over $1 trillion by 2029.

Assuming the long-term growth narrative for the semiconductor industry remains intact and Photronics can navigate current challenges with minimal damage, it should manage to chart a strong recovery from today's levels.