If you are a public equities investor betting on the digital economy, semiconductor stocks would have to be in your portfolio. Semiconductors are tiny electronic devices powering everything from our smartphones and personal computers to cars and commercial airplanes. If you take any run-of-the-mill semiconductor exchange-traded fund (ETF), say, the iShares Semiconductor ETF (NASDAQ:SOXX), many of the holdings have performed well year-to-date on their own, returning somewhere in mid-to-high double digits or triple digits. Still, choosing a semiconductor stock that would provide the best returns is not always easy. The semiconductor sector is crowded, and nowadays, there is a global economic slowdown to think about. Thus, certain businesses will end up as losers in the semiconductor space.
In this article, we will go over three semiconductor companies, and current shareholders are better off cutting their losses and selling.
Texas Instruments (TXN)
Math students may know this company only for its fancy calculators, but Texas Instruments (NASDAQ:TXN) has been a major player in the semiconductor space since the 1930s. Texas Instruments primarily operates two business segments: Analog and Embedded Processing. Relating to the former, analog semiconductor devices take real-world signals, such as sound or temperature, and convert them to an electronic signal other semiconductors can understand. For this reason, analog devices are paired with “embedded devices” and are used to manage, manipulate, and divert power in electronics. Selling analog devices contributed to 77% of the company’s whopping $22 billion sales figure in 2022. The latter business segment contributed to 16% of sales and involves devices designed for specific tasks, be it power management or performance enhancement.
Texas Instruments, unfortunately, has had very uneven sales growth since the early 2000s. In some years, like in 2021 or 2017, the semiconductor giant reported double-digit sales growth, but in other years, growth was either sluggish or contracted entirely. Quarterly sales in 2023 are below those of last year, indicating the company could be headed for a year-over-year sales decline. When probed about this worrying development on an earnings call, management had said they were making strategic investments to help revenue grow for the next 10 to 15 years. The answer was rather vague and made it difficult for investors to understand when the company could deliver on growth and margins number.
Of course, there are some investors willing to wait a decade for reinvigorated sales growth, but in a crowded market with more compelling business models and with shares returning just over 1% YTD, equity investors are probably better off looking elsewhere for yield.
Silicon Laboratories (SLAB)
Another story of once impressive growth, Silicon Laboratories (NASDAQ:SLAB) is another Texas-based semiconductor designer and manufacturer, and the company focuses on microcontrollers and sensor products that facilitate wireless connectivity. Naturally, SLAB’s end markets have expanded to include Internet of Things (IoT) applications, such as smart home and smart device communications. The IoT market was worth around $544 billion at the end of 2022 and should be worth more than 6x that in 2030, giving ample earnings opportunity for Silicon Laboratories and its shareholders.
However, acquiring said market value has not been easy, and navigating today’s macro environment has complicated things further. Silicon Labs has been able to deliver strong revenue growth and expanded gross margins in recent years, most likely due to the higher demand for electronics we saw during and shortly after the Covid-19 pandemic paralyzed the world in 2020. Nonetheless, 2023 revenue figures have been disappointing. In their July Q2’2023 earnings call, Silicon Labs reported YoY quarterly sales decline and expected a further decline in Q3 as bookings growth had slowed down severely. Slowed bookings growth was due to what management noted as companies becoming cautious of technology spending as the economic situation remains somewhat unstable. SLAB shares have not even risen 1% YTD, and investors perhaps should not wait for a miracle.
Wolfspeed (WOLF)
Founded in 1987, Wolfspeed (NYSE:WOLF) designs and fabricates a variety of silicon wafers and power devices. In particular, the company leverages silicon carbide and gallium nitride materials to create semiconductor technologies for electric vehicles (EV), fast charging, and wireless applications. Wolfspeed uses silicon carbide in its power devices while employing gallium nitride in its radio frequency (RF) devices that help telecommunication infrastructure function. Last year, Wolfspeed reported record YoY revenue growth on strong demand for its products across the board. Despite a record year, though, Wolfspeed has struggled with profitability over the past decade, unlike many of its semiconductor peers. Like Texas Instruments, revenue growth has also been unsteady, with too many peaks and troughs.
In their Q3’2023 earnings call in April, the company gave weaker-than-expected guidance, primarily due to the slow ramp-up of their new Mohawk Valley facility. WOLF shares have fallen more than 18% YTD, rendering the company’s shares amongst the worst performing in the space. With higher profitability not in sight, equity investors should consider other opportunities, as there are several profitable, growing semiconductor businesses in the space.
On the date of publication, Tyrik Torres did not have (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.
