Small-cap Semiconductor Stocks
The semiconductor industry has always been a cyclical industry with its fair share of ups and downs. When conditions are favorable, chipmakers have trouble keeping up with demand. This typically leads to over-investment in capital expenditure which will ultimately translate to supply exceeding demand and the resultant fall in chip prices and a scale-back in manufacturing and CAPEX. The cycle then repeats itself.
In this article, I will give a quick description of the semiconductor industry and identify 5 small-cap semiconductor stocks that have significantly outperformed the market in 2021. What has been the critical factor(s) that drove their share price performance this year and can that outperformance continue into 2021?
What Are Semiconductors And Why Are They So Important?
Semiconductors are substances with properties between that of a conductor (conducts electricity) and an insulator (does not conduct electricity). So, it conducts electricity better than an insulator such as glass, but less well than a pure conductor such as copper. Silicon is the most common semiconductor material used.
Semiconductors are so important because they are a requirement in products that we use every day such as our smartphones and laptops, electrical appliances, gaming hardware and medical equipment, etc.
They also underpin massive emerging trends such as cloud computing, 5G wireless networks and artificial intelligence.
Semiconductors fall into 2 main product categories, memory chips and logic chips although there are other categories such as Analog chips, Optoelectronics, Discretes and sensors.
1. Memory Chips
Memory chips store the digital data on which logic devices perform calculations. These chips are essential components in computers and electronic devices in which memory storage plays a key role. A popular memory chip acronym is DRAM (Dynamic Random Access Memory) as well as the term NAND that is often associated with flash drives.
DRAM provides storage of data while a computer operates but loses it when the computer powers down. By contrast, NAND flash memory stores data permanently.
Both these chips comprise 98% of the memory chip market which is estimated to have a $106bn market size in 2019. South Korea, US and Taiwan are the market leaders in the supply of memory chips while China is looking to play catch-up in this arena.
2. Logic Chips
The logic chip market is a fast-growing market that currently has an estimated market size of $173bn in 2019. Logic chips perform calculations on digital data (zeros and ones) to produce outputs.
They include microprocessors (CPUs), Graphics processing units (GPUs) often used for gaming, field-programmable gate arrays (FPGAs) and Application-specific integrated circuits for artificial intelligence (AI ASICs) where the likes of your Google, Tesla and Intel are the dominant players in this field.
Types Of Semiconductor Companies
Beyond the technicalities associated with semiconductor companies, with many new investors finding it difficult to differentiate between the thousands of semiconductor companies in the world, they can be broadly categorized into three main groups:
- Chip-equipment makers
- Foundries and integrated device manufacturer (IDM)
- Fabless chip companies
1. Chip Equipment Makers
The chip equipment makers are the ones who provide the equipment for chip manufacturing by the foundries to take place. Demand for their products is currently in high demand due to the shortage of chip manufacturing capacity.
This has benefited equipment makers such as Applied Materials, ASML, KLA, Lam Research and Teradyne which are among the largest chip equipment makers in the world.
2. Foundries And IDMs
The chip equipment makers supply their manufacturing products to foundries such as TSMC or IDMs such as Intel. A foundry is a fabrication company that makes chips that are designed by 3rd party customers while an IDM is a company that makes chips out of its design.
The biggest foundries in the world are the likes of your TSMC, Samsung, Global Foundries, SMIC, UMC, Powerchip and Hua Hong.
The biggest IDMs are the likes of your Intel, Samsung, SK Hynix and Micron.
3. Fabless Chip Design Companies
A fabless chip design company such as AMD is one where the company designs its chip for sale but does not do the actual fabrication work. Instead, it outsources that work to a foundry company such as TSMC.
Some of the biggest fabless chip design companies include AMD, Nvidia, Qualcomm, Broadcom, MediaTek and Apple, etc.
The table below illustrates the Top 15 Semiconductor sales leaders in Q1 2021:
The above is a simple introduction to the semiconductor industry which can be a lot more complicated vs. the simplified version that I seek to explain.
With that basic introduction, let us take a look at which are the 5 small-cap semiconductor stocks that you likely would not have heard of but have generated returns of 72-98% in just YTD 2021 alone.
Can their strong outperformance continue in the months ahead?
Top 5 Small-cap Semiconductor Stocks
#5: Axcelis Technologies (ACLS)
- Market Cap: $1.7bn
- YTD 2021 returns: 72%
ACLS is a company that designs, manufactures and services ion implantation and other processing equipment used in the fabrication of semiconductor chips. In addition to equipment, the company provides aftermarket lifecycle products and services, including used tools, spare parts, equipment upgrades, maintenance services and customer training.
ACLS is essentially a company that falls under the broad category of chip equipment manufacturers, competing against the likes of market leaders such as ASML, AMAT, Lam Research, etc. Needless to say, this particular sub-industry has witnessed strong demand from foundries and IDMs expanding their capacity in 2021/22.
The company is one of the top firms when it comes to high voltage ion implantation, with other players in this category being AMAT, SMIT (Japan) and CETC (China).
The company is forecasted to generate sales of approx. $630m in 2021, increasing to $690m in 2022. Forecasted EPS for 2022 is $3.03 which translates to a forward multiple of 16.5x which is considered relatively cheap for a semiconductor company.
Most covering analysts (just 5) are bullish on the counter with an average target price of $57.20 vs. its current price of $56.70.
From a trading perspective, TradersGPS has given off 2 entry signals over the past 3 weeks:
While there appears to be room to the upside, which would be a possibility to add positions, let’s take a look at the charts of the other counters as well. After all, what we are doing is also to find the best trade ideas, and not just jump in headfirst into a counter which looks promising.
#4: Camtek (CAMT)
- Market Cap: $1.7bn
- YTD 2021 returns: 79%
CAMT is engaged in the manufacturing of metrology and inspection equipment and a provider of software solutions serving Advanced Packaging, Memory, (complementary metal-oxide semiconductor) CMOS Image Sensors, (micro-electro mechanical systems) MEMS, RF and others.
Geographically, it derives maximum revenue from the Asia Pacific followed by the United States and Europe. The company’s products and services include Surface Inspection, Bump Inspection and Metrology and others.
Another chip equipment manufacturer, CAMT has seen very steady revenue growth since 2015, increasing its revenue from $69m in that year to $156m in 2020, with the street projecting its revenue to hit $265m and $290m in 2021 and 2022 respectively.
This chip manufacturer is also a profitable one, with forecasted EPS of $1.60 in 2022, translating to a forward PER of 40x based on its current share price, a tad expensive vs. ACLS, especially when its forward growth potential is not looking as robust as ACLS based on the street’s estimates.
Metrology and inspection which CAMT specializes in falls under the process control market which is dominated by the likes of KLAC and ASML, which are the market leaders in this area. Process control tools monitor wafers, photomasks and the overall chip manufacturing process to ensure consistency and low manufacturing error rates. Accordingly, they are among the most essential and valuable tools after lithography tools.
Now taking a look at its chart, CAMT had been on a uptrend for most part of the past year.
The last 2 months, however, has seen this counter trending sideways. This would not be an ideal counter for position trading on the daily charts, until the stock regains a clear trend.
#3: Synaptics (SYNA)
- Market Cap: $6.8bn
- YTD 2021 returns: 82%
Synaptics Inc develops human interface solutions that allow touch, display, fingerprint, video, audio, and voice functions for smartphones, PCs, automotive vehicles, consumer Internet of Things products, as well as other electronic devices.
The company is forecasted to generate close to $1.49bn in sales for 2022, with revenue increasing to $1.6bn in 2023. EPS for 2023 is forecasted to be at $10.96, which translates to a forward PER of approx. 16x based on the share price of $175.80.
Despite rather lackluster sales performance over the past 3 years, the company has performed well in terms of its share price, with the counter appreciating by 370% over the past 3 years.
According to its chart on TradersGPS, SYNA has just had a recent entry signal last week around $190.
After breaking through the resistance, SYNA has showed strength to continue surging higher. Despite its share of ups and downs, it has overall been trending upwards this past year as well. Similar to ACLS, should this strength continue, it would be an indication of room to the upside.
#2: Ambarella (AMBA)
- Market Cap: $6.4bn
- YTD 2021 returns: 90%
Ambarella Inc is a developer of semiconductor processing solutions for high-definition video capture, sharing, and display.
The firm’s solutions are sold to original design manufacturers and original equipment manufacturers to be designed for use in infrastructure broadcast encoders, wearable device cameras, automotive cameras, and security cameras.
Ambarella’s system-on-a-chip designs, based on its proprietary technology platform, are highly configurable to applications in various end markets. The firm derives the majority of its revenue from Taiwan.
The stock is currently trading at its highest level over the past 5-years and is expected to generate revenue of $389m in 2023 and a corresponding EPS of $1.88. This translates to a hefty forward PER of 93x based on its share price of $174.
Nonetheless, that has not stopped AMBA from outperforming its peers, probably because the company is riding on the megatrend of IoT as well as autonomous vehicles where the company’s chips used for AI Camera functions is one of the most comprehensive when it comes to automotive cameras, as can be seen from the diagram below.
Compared to the aforementioned companies, AMBA has appeared in recent times as one of the strong stocks in the TradersGPS screener. Let’s take a look at the chart:
The recent breakout for AMBA occurred in September. While it would not be wise to chase after the stock at this current point, aggressive traders may still wish to keep a lookout for opportunities to enter. Over a 2-month holding period on the first entry signal would have seen a 42.1% increase on this counter.
#1: SiTime (SITM)
- Market Cap: $4.2bn
- YTD 2021 returns: 98%
SiTime Corp is a USA-based provider of silicon timing systems solutions.
The company designs develop and sell silicon timing systems solutions for different industries including automotive, infrastructure, aerospace-defense, consumer, internet of things, consumer and industrials.
Its product offerings include Stratum 3E DCOCXOs, Programmable OCXOs, MHz Oscillators, 32.768 kHz Oscillators, Embedded Resonators, Precision MHz Super-TCXOs, and Ruggedized Oscillators. It sells its products around Taiwan, Hong Kong, the United States, and other regions and generates the majority of the revenue from Taiwan.
According to the company, they are the market leader when it comes to timing solutions for the MEMS segment (microelectromechanical systems).
The company does not have a long listing track record, listing on the Nasdaq in late 2019. The company is projected to generate $255m in sales in 2022, with a forecasted EPS of $3.10. That translates to a forward PER of 72x.
A key driver for the company in 2021 has been the transition from quartz timing to silicon timing used in various growing industries such as the autonomous vehicle sector that has driven strong demand for its products. Coupled with positive product pricing for its silicon timing chips and that has helped drive the growth in its recent financial performance as well as management providing relatively positive forward earnings guidance.
Let’s not forget to take a look – it appears rather similar as well, with entry signals appearing over the past 3 weeks.
A differentiator, though, would be that SITM had been trending sideways for the most part of the past year, only breaking higher from August onwards. Traders who are bullish on SITM may wish to keep a lookout for further entry opportunities as well, as this may also have room to the upside.
Conclusion: Best Small Cap Semiconductor Stocks
The semiconductor industry is a fascinating one dominated by a few big and popular names, the largest being TSMC, Nvidia and ASML. However, many other small-cap semiconductor companies have strong growth potential as well that might be flying under the radar.
According to the stock rover screener, some of the semiconductor companies with the fastest EPS growth rate over the coming 5-years are counters such as SITM, NOVA, VECO, HIMX and AMBA, with average annual EPS growth rates of between 80-125%, albeit from a low base.
Among the big cap names, semiconductor stocks like Marvel, Nvidia, On Semiconductor, Qualcomm, AMD, ASML, etc are also expected to generate annual EPS growth rates of between 25% to 40% over the coming 5-years.
Enjoyed this article on semiconductors? Read about the global semiconductor industry here and the valuation of semiconductor stocks here.
If you enjoyed reading this article and various other investment + personal finance articles, do visit New Academy of Finance. Royston has more than 10 years of buy and sell side experience as a financial analyst. He constantly posts interesting, valuable and actionable articles.
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