We recently compiled a list of the 10 Small Publicly Traded Semiconductor Companies To Buy. In this article, we are going to take a look at where Photronics, Inc. (NASDAQ:PLAB) stands against the other small publicly traded semiconductor stocks.
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.
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).
An engineer manipulating a complex circuit board that will be used in flat panel displays.
Photronics, Inc. (NASDAQ:PLAB)
Number of Hedge Fund Investors In Q1 2024: 19
Photronics, Inc. (NASDAQ:PLAB) makes and sells one of the most important chip manufacturing materials, the photomask. A photomask is what allows companies like TSMC and Samsung to use NVIDIA’s chip designs and transfer them to a silicon wafer to manufacture a chip. A slowdown in the broader semiconductor market, covering display, mature nodes, and other regions led to a weak materials market in 2023. This was also evident in China, where businesses are struggling with an economic slowdown as well. Since the sector takes some time to recover after a slowdown, Photronics, Inc. (NASDAQ:PLAB) might struggle in the future as well. These trends were also evident during its latest earnings report, which saw the firm’s adjusted EPS of $0.46 miss analyst estimates of $0.55.
Photronics, Inc. (NASDAQ:PLAB)’s two key business divisions deal with integrated circuits (ICs) which cover CPUs and other chips and high end LPDs (liquid phase deposition) used in display manufacturing. The firm shared details for both these divisions during the latest earnings call where it shared:
IC sales improved quarter-over-quarter while LPD decreased. Compared with the first quarter, gross margin was similar and operational margin was largely lower as we had higher R&D expense driven by an increase in qualification activity. As a result, reported EPS was $0.58. On an adjusted basis, EPS was $0.46. Cash flow was good during the quarter and we further strengthened our balance sheet to position us to invest in the market [indiscernible] growth opportunity we have, especially in IC. I would like to recognize the dedication of the global Photronics team this quarter to achieve these results, especially those in Taiwan that responded to added challenges. Turning to the market, reversing a trend seen over the previous three quarters, our IC mainstream sales increased, mainly driven by market share gains.
High end was down primarily due to lower U.S. demand. Consistent with most of the end users, we see the overall semiconductor environment gradually improving into our fiscal Q3 and Q4 across most IC segments and regions. High end LPD was softer as AMOLED design demand has [indiscernible] ahead of new premium smartphones that should begin production ahead of fall launches. Longer term, we remain optimistic regarding positive demand trends for both IC and LPD. IC customers in Asia continue to migrate to smaller design nodes, including 32 and 28 nanometers. We are well positioned to capture this business. We also expect megatrends, such as AI, to drive chip design activity to handle AI workloads and edge processes. We expect a wide range of IC types be developed in support of this AI ecosystem from GPU, CPU and ASIC, to high band memory and power electronics.
Overall PLAB ranks 5th on our list of the best small publicly traded semiconductor stocks to buy. You can visit 10 Small Publicly Traded Semiconductor Companies To Buy to see the other semiconductor stocks that are on hedge funds’ radar. While we acknowledge the potential of PLAB as an investment, our conviction lies in the belief that AI stocks hold greater promise for delivering higher returns, and doing so within a shorter timeframe. If you are looking for an AI stock that is more promising than PLAB but that trades at less than 5 times its earnings, check out our report about the cheapest AI stock.
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Disclosure: None. This article is originally published at Insider Monkey.