In this piece, we will take a look at the 10 small publicly traded semiconductor companies to buy.
The semiconductor industry has become one of the most important in the world, akin to the key role that oil plays in the global economy. While making this argument would have been tricky in 2022, 2023 and the onset of the artificial intelligence boom makes it much easier to say so. This is because chip companies sit right at the heart of the AI revolution due to their ability to transform literal sand on a beach into pieces of silicon that aim to meet or surpass human intelligence.
This criticality of semiconductors to the global economy and AI has translated into share price performance as well. Wall Street, always eager to catch the next big trend before it occurs, has piled into semiconductor stocks with no end in sight. Some of the biggest semiconductor firms in the world are up by 211% over the past twelve months, and their share price performance is matched by equally impressive revenue growth which would have been thought to be impossible just a couple of years back.
Semiconductor stock indexes which are made of the most consequential chip firms in the world have also gained value. Semiconductor stock indexes, maintained by the S&P and the Philadelphia Stock Exchange are up 17.26% and 57.94% respectively over the past twelve months. This burst of performance comes after a disastrous 2022 that saw big and small semiconductor stocks tumble in the wake of a historic demand and supply mismatch following the coronavirus pandemic. The semiconductor sector is highly cyclical, and between the start of 2022 and the market bottom in October, the S&P’s semiconductor stock index had lost 42% while Philly’s index was down by 43%.
When it comes to valuing semiconductor stocks, some investors prefer to use the price to earnings growth (PEG) ratio instead of the more popular price to earnings (P/E) ratio. The PEG ratio also accounts for earnings growth, and when we look at some fast growing semiconductor stocks with vastly different market capitalization and revenue base, the ratio hovers around 1.45 to 1.48 for both of them. This ratio can inform investors about the future trend of a firm’s stock based on its historic EPS growth to see whether there is an earnings growth trend that can be exploited.
As for investing in semiconductor stocks, some research shows that it might be worth it. One such paper comes from researchers in China who used a benchmark portfolio of US listed semiconductor stocks on the NASDAQ and NYSE with an enterprise value greater than $50 billion and generated a forecast portfolio using the free cash flow to the firm (FCFF) model to check whether future cash flows merit a current investment. Their study revealed that not only was the benchmark portfolio undervalued by 30.56%, but it had an even higher undervaluation of 37.29% when the P/E ratio was analyzed. Of course, the cutoff date for the research was April 2023, so some of the growth predicted in this model has already materialized by now.
Finally, before we head to our list of the top small publicly traded semiconductor companies, it’s also important to see what experts think about the future direction of the industry. Research from Gartner shows that global semiconductor revenue will grow by 17% in 2024 to sit at $628 billion, with the growth fueled by a whopping 66% growth in the memory industry. The product end of the semiconductor industry is broadly bifurcated into application processors (such as CPUs and GPUs) and memory products (such as RAM), and often, different firms dominate either area. The 17% Gartner growth estimate is matched by a 16% growth estimate from the World Semiconductor Trade Statistics (WSTS). McKinsey estimates that global semiconductor sales will reach $1 trillion by 2030.
Currently around two thirds of global semiconductor sales take place in Asia. About 75% of global wafer fabrication capacity is in 4 Asian countries: Taiwan, South Korea, China, and Japan. In August 2022, President Biden signed into law the CHIPS and Science Act of 2022, providing $39 billion in incentives over 5 years to bolster semiconductor manufacturing in the US. Overall, the semiconductor industry is very active both on the demand side and the supply side. There are some signs that this industry might be in bubble territory. According to Aswath Damodaran, semiconductor industry contains 63 firms and these firms have an average EV/EBITDA ratio of 31.6. This is the highest EV/EBITDA multiple among all industries tracked by Damodaran (only positive EBITDA firms are considered for these calculations).
With these details in mind, let’s take a look at some small publicly traded semiconductor companies. As compared to the giants, there might be greater growth runways to these firms, allowing the prescient investor to capitalize early on.
A close-up of a lithium-ion battery surrounded by a network of silicon nanowires.
Our Methodology
To make our list of the top small publicly traded semiconductor companies, we ranked semiconductor and semiconductor equipment stocks with a market cap lower than $2 billion by the number of hedge funds that had bought the shares in Q1 2024. Out of these, the top stocks were chosen.
Why are we interested in the stocks that hedge funds pile into? The reason is simple: our research has shown that we can outperform the market by imitating the top stock picks of the best hedge funds. Our quarterly newsletter’s strategy selects 14 small-cap and large-cap stocks every quarter and has returned 275% since May 2014, beating its benchmark by 150 percentage points (see more details here).
10. Arteris, Inc. (NASDAQ:AIP)
Number of Hedge Fund Investors In Q1 2024: 16
Arteris, Inc. (NASDAQ:AIP) is a small semiconductor licensing firm that provides technology blueprints for key areas of a chip that are called interconnects. These are circuits that connect various elements of a semiconductor with each other. This also makes Arteris, Inc. (NASDAQ:AIP) provide technologies that are used in the designs of systems on chips (SoCs). These are compact packages that integrate different elements such as memory and application processors on a single package. A key standout aspect of Arteris, Inc. (NASDAQ:AIP) is the fact that it is a merchant IP provider. This means that the firm’s products are available to a wide variety of chip designers, and it implies that should the strong trend of custom AI chip designs continue, then Arteris, Inc. (NASDAQ:AIP) could play a key role in the democratization of AI chip design and allow smaller players to emerge in the market.
One such example is Arteris, Inc. (NASDAQ:AIP)’s partnership with Mercedes Benz for the latter’s network on chip (NoC). During the firm’s latest earnings call, management commented on the deal and shared:
We are excited to be partnering in pioneering a reference with Mercedes Benz for its network-on-chip, and last level cache implementations as part of the ADU platform, addressing a full range of autonomous driving applications. Another collaboration in the first quarter, included expanding our RISC-V ecosystem support, to help offer on-chip connectivity for companies deploying the Damo-XuanTie processor IP in their SoCs. This collaboration underscores Arteris capability to support processor choices made by our customers, including the support of both Arm and RISC-V processors on the same SoC. Currently, certain macroeconomic dynamics, including geopolitical uncertainties and the U.S. BIS restrictions concerning China, U.S. trade, continue to impact our business, though we are not seeing further deterioration at this time.
While these dynamics do create near-term headwinds, we believe that the scale and scope of our long-term opportunity remains robust, supported by a strong product pipeline of new system IP technologies, and solid relationships with some of the largest electronics companies in the world, who continue to innovate in exciting areas such as generative AI and autonomous driving, using our Arteris system IP technologies. With that, I’ll turn it over to Nick, to discuss our financial results in more detail.
9. ACM Research, Inc. (NASDAQ:ACMR)
Number of Hedge Fund Investors In Q1 2024: 18
ACM Research, Inc. (NASDAQ:ACMR) is a mid sized specialized semiconductor equipment provider that deals with products that enable chip manufacturers to control quality and yield by cleaning the silicon wafers during fabrication. Its business model means that ACM Research, Inc. (NASDAQ:ACMR) benefits when there is a growth in global chip manufacturing. Right now, not only has the US government announced $280 billion in funding to develop semiconductors in America, but European, South Korean, Taiwanese, and Japanese governments have also either launched or might launch similar initiatives. The de globalization of semiconductor supply chains is a hot topic in the industry right now, and ACM Research, Inc. (NASDAQ:ACMR) stands to benefit particularly when it expands its presence globally. Another key to its success is maintaining customer relationships, cost advantages, and technological competence to ensure that current or potential competitors do not snatch market share.
However, ACM Research, Inc. (NASDAQ:ACMR) might be harmed if trade tensions between the US and China restrict US chip company sales in the country. During its Q1 2024 earnings call, management shared a lot of details about ACM Research, Inc. (NASDAQ:ACMR)’s international initiatives when it shared:
Our growth is also being driven by new entrants. On the international front, we plan to deliver ULTRA C v backside cleaning and a bevel etcher tool in the second quarter of 2024 to a large US manufacturer that qualify as the first SAP cleaning tool for revenue last year. This demonstrates a deepening relationship which we believe can lead to production orders across multiple product lines. Moreover, ACM brand and the reputation are gaining recognition among other US chip makers with new engagement and the potential opportunity to penetrate their global manufacturer sites. We recently hired additional seasonal marketing and sales professionals who bring establishing their relationship with key US semiconductor players.
In Europe, we install our first ever evaluation tool, the ULTRA C SAPS V cleaning tool at a major global semiconductor manufacturer in the fourth quarter last year. The initial feedback has been positive and we are optimistic that the volume production order possible by middle of the year. We think Korea we see opportunity with SK Hynix, high bandwidth memory HDM product. We see potential gains with our SAPS cleaning tool for high aspirational vehicles as well as ultra ECP for TSV applications. To support growth, we made a progress in our facility expending in China and other regions. Please turn to Slide 8. In China, construction of our Lingang production R&D center is nearly complete. We expect the production later this year. In Korea, we are making progress with key customers, we believe a strong commitment to Korea can improve our relationship with key Korean customers.
Our resource in Korea can also provide another basis to supporting international customer in the US, Europe and other parts of Asia. We recently hired a new leader to run our Korea operations, David Kim. He is a long-time veteran of SK Hynix, we are optimistic his experience and relationship will help adoption our technology and accelerate our business in the region. We continue to invest in our Oregon site to add to our service, support and demonstration capability for R&D and customer activity in the US and Europe. I would now provide our outlook. Please turn to Slide 9. We believe WFE spending in China will remain solid as the country continues on its goal to match its production capacity with the end-market consumption. We are focused on gaining market share in China, new product introduction and expanding our business to new customers in the USA, Korea, Europe and other Asia markets.
