2 Stocks to Buy From the Challenging Semiconductor Industry

The Zacks Electronics - Semiconductors industry is suffering from macroeconomic challenges, end-market volatility, broad-based inventory correction and growing geopolitical tensions. Tariffs on trade partners, including China, are expected to hurt the industry’s prospects. However, industry players are benefiting from the growing proliferation of AI, Generative AI (Gen AI), IoT, Machine Learning (ML) and industrial revolution 4.0 (which focuses on interconnectivity and automation). These have turned out to be boons for industry players like Broadcom AVGO and Applied Materials AMAT. Increasing demand for AI-supportive chips from hyperscalers is a major growth driver. The growing demand for high-volume consumer electronic devices, including digital media players, smartphones, tablets, efficient packaging, machine vision solutions and robotics, should continue to drive the industry’s growth. 

Industry Description

The Zacks Electronics – Semiconductors industry comprises companies that provide a wide range of semiconductor technologies. Their offerings include packaging and test services, wafer cleaning, factory automation, face detection and image-recognition capabilities to develop smart and connected products. The industry participants primarily cater to end markets that include consumer electronics, communications, computing, industrial and automotive. The companies are increasing their spending on research and development to stay afloat in an era of technological advancements and changing industry standards. The industry is experiencing solid demand for advanced electronic equipment, which is helping its participants increase their investments in cost-effective process technologies.

What's Shaping the Future of the Electronics - Semiconductors Industry?

AI Demand Driving Prospects: Industry participants are benefiting from growing demand for advanced manufacturing processes and energy-efficient computing power, both of which are needed to develop AI-supportive chips. AI is gaining popularity thanks to multimodal learning and growing context awareness. The emergence of Gen AI and Agentic AI has further enhanced AI’s capabilities, making it a key driver of efficiency, automation and innovation. Significant improvements in computing hardware (GPUs and TPUs) are allowing the development of more complex AI models. The growing number of high-speed data centers worldwide, which require ultra-fast Internet that 5G promises to deliver, is a tailwind. Increased connectivity and use of technology in consumer electronics through IoT, AI, robotics, AR/VR and others further set the momentum for 5G.

Smart Devices Aiding Computing Demand: Smart devices need computing and learning capabilities to perform functions like face detection, image recognition and video analytics capabilities. These require high levels of processing power, speed and memory and low power consumption, as well as better graphics processors and solutions, which bode well for the industry. Graphic solutions help increase the speed of rendering images and improve image resolution and color definition.

Prospects Around Advanced Packaging Robust: The increasing demand for miniaturization, greater functionality, lower power consumption, and improved thermal and electrical performance are driving the demand for semiconductor packaging and test technologies. The growing requirement for advanced packaging is gaining traction in the semiconductor industry, which is a key catalyst for industry participants.

Complex Process Drives Demand: The requirement for faster, more powerful and energy-efficient semiconductors is expected to increase rapidly with the robust adoption of cloud computing, IoT and AI. Semiconductor manufacturers are primarily looking to maximize manufacturing yields at lower costs, making semiconductor manufacturing processes more complex and driving the demand for solutions offered by industry participants. The rapid adoption of IoT-supported factory automation solutions is another contributing factor. 

Zacks Industry Rank Indicates Dim Prospects

The Zacks Electronics - Semiconductors industry is housed within the broader Zacks Computer and Technology sector. It currently carries a Zacks Industry Rank #182, which places it in the bottom 25% of more than 250 Zacks industries.

The group’s Zacks Industry Rank, which is the average of the Zacks Rank of all the member stocks, indicates bearish near-term prospects. Our research shows that the top 50% of the Zacks-ranked industries outperform the bottom 50% by a factor of more than two to one.

The industry’s positioning in the bottom 50% of the Zacks-ranked industries is a result of the negative earnings outlook for the constituent companies in aggregate. Looking at the aggregate earnings estimate revisions, it appears that analysts are optimistic about this group’s earnings growth potential. Since April 30, 2025, the industry’s earnings estimates for the current year have moved down 3.6%.

Given the bearish prospects, there are only a few stocks that you can consider for your portfolio. However, before we present the stocks, let us look at the industry’s recent stock-market performance and valuation picture.

Industry Outperforms S&P 500 & Sector

The Zacks Electronics - Semiconductors industry has outperformed the Zacks S&P 500 composite and surpassed the broader Zacks Computer and Technology sector in the past year.

The industry has appreciated 51.5% over this period compared with the Zacks Computer and Technology sector’s return of 29.1% and the S&P 500’s appreciation of 20.3%.

One-Year Price Performance

 

Industry's Current Valuation

On the basis of the forward 12-month price-to-earnings ratio, which is a commonly used multiple for valuing electronics semiconductor stocks, the industry is currently trading at 34.32X versus the S&P 500 and the sector’s 22.69X and 28.15X, respectively.

Over the past five years, the industry has traded as high as 34.32X and as low as 11.05X, with the median being 19.7X, as the charts below show.

Forward 12-Month Price-to-Earnings (P/E) Ratio
 

 

 

2 Electronics Semiconductor Stocks to Buy

Broadcom: This Zacks Rank #2 (Buy) company is benefiting from strong momentum fueled by growth in AI semiconductors and continued success with its VMware integration. You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

Strong demand for Broadcom’s networking products and custom AI accelerators (XPUs) has been noteworthy. AVGO’s AI segment benefits from custom accelerators and advanced networking technology that support large-scale AI deployments with improved performance and efficiency. Broadcom expects third-quarter fiscal 2025 AI revenues to jump 60% year over year to $5.1 billion. The acquisition of VMware has benefited Infrastructure software solutions. As of the fiscal second quarter, roughly 87% of Broadcom’s largest 10,000 customers have adopted VMware Cloud Foundation.

Broadcom stock has appreciated 31% year to date (YTD). The Zacks Consensus Estimate for AVGO’s fiscal 2025 earnings has been steady at $6.63 per share over the past 60 days.

Price & Consensus: AVGO

 

Applied Materials: Another Zacks Rank #2 stock, AMAT is benefiting from strength in the Semiconductor Systems, owing to a rebound in the semiconductor industry, particularly in the foundry logic space.

Solid momentum in the subscription and display businesses is a plus for Applied Materials. The company’s strong position in IoT, Communications, Auto, Power and Sensors (ICAPS) has helped it gain market share. AMAT’s diversified portfolio remains its key growth driver.

Applied Materials has appreciated 16.2% YTD. The Zacks Consensus Estimate for AMAT’s fiscal 2025 earnings has declined by a penny to $9.46 per share over the past 30 days.

Price & Consensus: AMAT

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Broadcom Inc. (AVGO): Free Stock Analysis Report
 
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This article originally published on Zacks Investment Research (zacks.com).

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