An updated screen highlights chip makers expected to show high-double-digit growth rates, along with some surprisingly low stock valuations
Following Nivida Corp.'s last blowout quarterly earnings report in August, we screened semiconductor stocks to see which industry players were expected by analysts to increase their revenue most quickly over the next two years. At that time, Nvidia ranked second to Wolfspeed Inc. But the analysts have updated their estimates and rolled out new 2025 numbers for some of the companies, so it is time for another screen.
Nvidia (NVDA) dominates coverage for makers of computer chips and related hardware because data centers are rushing to install its graphics processing units to support their customers' rollout of artificial-intelligence technology. For its most recent reported fiscal quarter, which ended July 30, the company reported an 88% increase in sales from the previous quarter and a 101% increase from a year earlier.
Nvidia is also, by far, the largest semiconductor manufacturer by market capitalization. The company is so large, with a market value of $1.09 trillion for its common shares, that it makes up 3% of the SPDR S&P 500 ETF Trust's SPY portfolio.
Something else to keep in mind is that commonly used forward price-to-earnings valuation ratios are based on 12-month estimates. These are available by clicking the tickers for any stock in this article. But for a company such as Micron Technology Inc. (MU), this forward P/E ratio isn't available because the company — a large industry name with a market cap of nearly $76 billion — isn't expected to return to profitability until the fiscal quarter that will end on Aug. 31, 2024. We will look further out, showing valuations based on current share prices and consensus 2025 estimates below.
The new screen of chip makers' stocks
To screen semiconductor manufacturers and companies that make the equipment those manufacturers use or provide related services, we began with the 30 companies held by the iShares Semiconductor exchange-traded fund SOXX, which tracks the PHLX Semiconductor Index SOX. Then we added the 30 additional companies in the S&P Composite 1500 Index XX:SP1500 that are in the semiconductor industry, as determined by FactSet, or in the Semiconductors and Semiconductor Equipment Global Industry Classification Standard group. The S&P Composite 1500 is made up of the S&P 500 SPX, the S&P 400 Mid Cap Index MID and the S&P Small Cap 600 Index SML.
For a uniform set of data, we used consensus estimates among analysts polled by FactSet for sales and earnings in U.S. dollars for calendar years 2023 through 2025. We used calendar years because some companies have fiscal quarters that don't match the calendar. For example, Micron's fiscal 2023 ended on Aug. 31. Starting with the 2023 estimates sets a baseline that incorporates Nvidia's remarkable sales growth this year.
Among the 60 companies, consensus sales estimates are available through calendar 2025 for 52 of them, up from 48 when we last screened the group in August, with Micron a notable addition. Wolfspeed (WOLF) moves down to the third position because Nvidia's consensus 2025 sales estimate has increased since we pulled data for the previous screen on Aug. 24, but also because the consensus 2025 sales estimate for Wolfspeed has declined to $1.683 billion from the previous $1.737 billion estimate.
Among the 52 companies, these 20 are expected by analysts to show the highest compound annual growth rates for sales from 2023 through 2025. Calendar-year sales estimates are in millions.
SOXX trades at a forward P/E valuation of 15.7 and forward price-to-sales valuation of 4.3, based on weighted consensus estimates for its component stocks for 2025. The expected sales-per-share CAGR for SOXX from 2023 through 2025 is 11.3%.For the S&P 500, the forward P/E and price-to-sales valuations based on 2025 estimates are 15.9 and 2.2, respectively. The U.S. benchmark index's expected two-year sales-per-share CAGR through 2025 is 5%.
Micron expects to take a leading industry position when it brings its next-generation HBM3 chips to market in 2024. These memory components are used when Nvidia GPUs are installed. Micron is also expected to continue its recovery from the downturn that followed a spike in sales for its computer-storage memory products in 2021, at the height of the work-from-home trend during the COVID-19 pandemic.
Investors anticipating steady improvement have sent Micron's stock up 38% this year. But Micron's shares trade at low P/E and price-to-sales valuations based on the calendar 2025 estimates when compared with those for SOXX and especially when compared with Nvidia.
There is no P/E valuation on the table for Wolfspeed because the company's combined earnings for calendar 2025 are expected to be negative.
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Originally published on MorningStar.com