1 Semiconductor Stock to Own for Decades and 2 Facing Headwinds

Semiconductors are the picks and shovels of modern technology. The amount of data we ingest is also increasing exponentially, leading to elevated demand for chips with more processing power. This secular trend bodes well for the industry, which has posted a six-month gain of 28.1% and beat the S&P 500 by 12.4 percentage points.

Nevertheless, a cautious approach is imperative because Moore’s Law (a principle stating that computer productivity doubles every two years) will eventually make even the most impactful technologies today obsolete. On that note, here is one semiconductor stock boasting a durable advantage and two that may face trouble.

Two Semiconductor Stocks to Sell:

Seagate Technology (STX)

Market Cap: $40.25 billion

The developer of the original 5.25inch hard disk drive, Seagate (NASDAQ:STX) is a leading producer of data storage solutions, including hard drives and Solid State Drives (SSDs) used in PCs and data centers.

Why Does STX Fall Short?

1. Customers postponed purchases of its products and services this cycle as its revenue declined by 2.8% annually over the last five years
2. Competitive supply chain dynamics and steep production costs are reflected in its low gross margin of 30.4%
3. Poor free cash flow margin of 9.5% for the last two years limits its freedom to invest in growth initiatives, execute share buybacks, or pay dividends

Seagate Technology’s stock price of $189.50 implies a valuation ratio of 19.3x forward P/E. Dive into our free research report to see why there are better opportunities than STX.

Skyworks Solutions (SWKS)

Market Cap: $11.23 billion

Result of a merger of Alpha Industries and the wireless communications division of Conexant, Skyworks Solutions (NASDAQ: SWKS) is a designer and manufacturer of chips used in smartphones, autos, and industrial applications to amplify, filter, and process wireless signals.

Why Do We Pass on SWKS?

1. Customers postponed purchases of its products and services this cycle as its revenue declined by 10.1% annually over the last two years
2. Forecasted revenue decline of 7.8% for the upcoming 12 months implies demand will fall even further
3. Expenses have increased as a percentage of revenue over the last five years as its operating margin fell by 21.5 percentage points

Skyworks Solutions is trading at $76.73 per share, or 19.1x forward P/E. If you’re considering SWKS for your portfolio, see our FREE research report to learn more.

One Semiconductor Stock to Buy:

Broadcom (AVGO)

Market Cap: $1.63 trillion

Originally the semiconductor division of Hewlett Packard, Broadcom (NASDAQ:AVGO) is a semiconductor conglomerate spanning wireless communications, networking, and data storage as well as infrastructure software focused on mainframes and cybersecurity.

Why Should You Buy AVGO?

1. Annual revenue growth of 30% over the last two years was superb and indicates its market share increased during this cycle
2. Offerings are difficult to replicate at scale and result in a best-in-class gross margin of 76.1%
3. Impressive free cash flow profitability enables the company to fund new investments or reward investors with share buybacks/dividends

At $346.28 per share, Broadcom trades at 44.6x forward P/E. Is now the time to initiate a position? Find out in our full research report, it’s free.

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