4 Semiconductor Stocks to Watch as Smartphone Sales Wane

Chris Lau, Kapitall: Could a weakening market for smartphones hamper these four semiconductor stocks? 

Once touted as providing infinite growth in the tech sector, smartphone sales may finally be weakening. Smartphone bellwether Samsung (OTC: SSNLF) reported higher net profits and sales, but operating profits declined in its last quarter of 2013.

Even more worrisome is that the company warned that the first quarter of 2014 will be weaker than expected. Should investors be worried? Fortunately there are a number of characteristics that vulnerable stocks have in common, making them easier to spot. 

Valuation

Companies valued with a high forward P/E (or price of profit) are at risk of selling off. Take a look at NVIDIA (NVDA) for instance. Its forward P/E is 22:

Click on the interactive charts below to see data over time. Sourced from Zacks Investment Research.

By comparison, Quacomm (QCOM), SanDisk (SNDK), and Micron (MU) are valued far less. Micron stands out as having one of the lowest valuations in the semiconductor group.

Outlook

NVIDIA, which is set to report earnings on February 12, is undergoing a multi-year transition from traditional desktop chip sales to mobile sales. The release of its Tegra K1 processor is aimed to help the company compete more effectively against Qualcomm.

Investors are clearly optimistic NVIDIA will be successful, however Qualcomm is already very successful with its Snapdragon chip. Still, Qualcomm could face headwinds if sales for Samsung stagnate and the company misses its sales forecasts for the phones and tablets. 

Learn more: Compare analyst ratings to annual returns for stocks mentioned.

SanDisk, Micron

SanDisk, which reported Q4 earnings of $1.61 per share, is optimistic that sales for SSDs (solid state drives) will grow. The company had a strong 2013, with embedded revenue growing 37%. SSD revenue grew at a faster rate, up 170% last year. Gross margin was 50.9%. Samsung relied on more than half of its unit sales in the emerging markets.

Micron’s prospects are also very strong. The chip maker is benefiting from strong memory prices, but is taking a measured approach toward supporting growth and keeping margins steady. Micron is shifting from DRAM to NAND, to maximize the return on transitioning to 16 nanometer production. Micron will have production samples by early calendar Q2.

High short term risks?

A relatively lower valuation for Micron and Qualcomm may not prevent shares from selling off, but it does make these companies more attractive. It seems inevitable that the rate of smartphone sales would moderate after many years of rapid growth, although the long-term demand remains strong and the upgrade cycle for end users unlikely to slow down.

Do you think these smartphone suppliers are worth investing in? Uset the list below as a starting point for your own analysis. 

1. NVIDIA Corporation ( NVDA): Provides visual computing, high performance computing, and mobile computing solutions. Market cap at $8.82B, most recent closing price at $15.18.
 

2. QUALCOMM Incorporated ( QCOM ): Engages in the development, design, manufacture, and marketing of digital wireless telecommunications products and services. Market cap at $124.03B, most recent closing price at $72.96.

 

3. SanDisk Corp. ( SNDK ): Designs, develops, manufactures, and markets NAND-based flash data storage card products that are used in various consumer electronics products. Market cap at $15.52B, most recent closing price at $67.40.

 

4. Micron Technology Inc. ( MU ): Engages in the manufacture and marketing of semiconductor devices worldwide. Market cap at $20.86B, most recent closing price at $20.19.

 

 

Written by Chris Lau Kapitall Wire contributor.  All data sourced from Zacks Investment Research.)​

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