If you're looking to get a better understanding of what's going on in the tech world, keeping up on news and watching stocks in the semiconductor sector is a great idea. From the computer, to the mobile phone, to the Internet servers that allow easy browsing of the Web, semiconductors are at the heart of the major technology trends that have shaped the world in recent decades.
Companies that design and manufacture chips will continue to have a huge impact on the rate of technological progression, so it's worthwhile to have some semiconductor companies on your investment watch list. Here's why Intel (NASDAQ:INTC), Qualcomm (NASDAQ:QCOM), and Ambarella (NASDAQ:AMBA) should be on that list.
Intel stock has seen some significant swings over the last year due to performance of and expectations for the PC market. Shares hit a 10-year high in December 2014, but they're down roughly 17% in 2015, owing primarily to soft demand for computer chips. In its last fiscal quarter, Intel's sales came in roughly $1 billion below initial expectations, as computer manufacturers slowed down production and focused on moving existing inventory. Sales of desktop chips were down roughly 16%.
In Intel's last fiscal year, 62% of the company's sales came from its PC Client Group, so continued weakness in personal computing demand would have a large impact on Intel's performance. Yet, even with turbulence in its most importance business, Intel may still be an attractive investment option. The company has growth opportunities in servers, mobile, and Internet of Things technologies, as well as an attractive dividend profile.
While PC chips account for the majority of Intel's sales, the company gets its best margins on servers, which accounted for 29% of sales in the last quarter, and 65% of operating income. Server revenues were up 19% year over year in the last quarter, while Internet of Things revenues grew 11%, and Intel looks to benefit from growing demand as more devices are built with Internet connectivity -- so long as it can continue to fend off competition. On the mobile front, Intel has taken heavy losses and is still trying to break into the market and establish a large enough customer base to benefit from scaling, but big potential remains if the company can establish a solid foothold.
Recent dips in Intel's share price have pushed its dividend yield to roughly 3.2%, which is well above the roughly 2.4% return offered by a 10-year Treasury Bond. The company has never lowered its dividend, and its current payout ratio sits at 44.5%, which suggests the company still has a bit of room for payout growth even if significant earnings growth doesn't arrive in the near term.
Valuation wise, Intel has a forward P/E value or roughly 14, with a comparison to the S&P 500's forward P/E value of roughly 18, indicating the stock is reasonably priced and perhaps undervalued.
While Intel dominates the PC semiconductor market, Qualcomm is the clear leader in the mobile space. The company has the majority share of both mobile baseband and processing chip markets -- a great position to be in given that mobile adoption and utilization continues to grow.
Like Intel, Qualcomm has the potential to be a major beneficiary of the Internet of Things revolution, with its strength in mobile baseband chips making it a likely candidate to supply Internet connectivity modems in a range of traditionally unconnected tech products and appliances.
Going off price relative to projected earnings, Qualcomm's current valuation looks very fair, with a forward P/E value of roughly 14.5, and its strong position in the growing mobile sector creates the opportunity for continued success. Last quarter, the company's revenues increased by roughly 8%; meanwhile, Intel's revenues were flat.
Qualcomm also offers an attractive dividend, with a current yield of roughly 3% and a payout ratio of 44.7%. The company has never lowered its payout and has increased its dividend by roughly 153% over the last five years, while Intel's dividend growth over the period stands at roughly 52%.
Ambarella designs low-power-consumption image and video processing chips for use in action cameras, drones, IP security systems, and automobiles. The company is a small cap at roughly $3 billion, and its stock has been on a major tear. Shares are up more than 100% year to date, and roughly 1,590% since the company went public in 2012. This incredible valuation growth has pushed the company's forward P/E up to roughly 38, however Ambarella's strong position and growth opportunities may justify its lofty valuation.
Last quarter, the company grew sales roughly 73.5% and delivered gross margins of 64.8%, and it expects margins as high as 65.1% in the current quarter. The company is benefiting from strong sales of GoPro cameras as well as emerging devices in the action camera segment from companies including Xiaomi and Garmin, and its sales of IP security camera chips have increased by 100% annually for two consecutive years. Ambarella is also seeing strong uptake for its aerial drone cameras, with sales of chips for these devices expected to surpass 10% in the current fiscal quarter.
Going forward, the company is aiming to build strength in analytics in order to support Internet of Things technologies and build strength in the automotive camera sensor segment. Ambarella's strength in its sector and relatively small size make it a potential target for acquisition, and some analysts have speculated that Qualcomm may be a suitor. Investing based on the hope for an acquisition doesn't make sense, but Ambarella has enough going for it on its own to put it on investors' watch lists.
Keith Noonan has no position in any stocks mentioned. The Motley Fool recommends Ambarella, GoPro, Intel, and Qualcomm. The Motley Fool owns shares of Ambarella, GoPro, and Qualcomm. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.