The semiconductor industry and by construct, the Philadelphia Semiconductor Index, have largely outperformed the tech-heavy Nasdaq (COMP.IND) to start 2023. However, investment firm Wells Fargo said that with earnings season coming up, investors may want to be a bit more selective with their holdings.
Analyst Gary Mobley listed NXP Semiconductors (NASDAQ:NXPI) and Wolfspeed (NYSE:WOLF) as the firm’s top two semiconductor stocks to own heading into earnings, but for differing reasons.
For Netherlands-based NXP (NXPI), which generates a significant portion of its revenue from the automotive and industrial industries, Mobley said Wall Street has become “too pessimistic” for the second half of 2023, and all of 2024.
A consensus of analysts expect NXP (NXPI) to earn $3.01 a share on $3B in revenue for the upcoming quarter. For the full-year, they expect NXP (NXPI) will earn $12.66 a share and $12.41B in revenue.
By comparison, Mobley is forecasting NXP (NXPI) to post earnings of $12.10 a share for 2023 and $14.35 per share for 2024.
Regarding Wolfspeed (WOLF), Mobley expects the company to ramp up its Mohawk Valley 200 millimeter silicon carbide wafer fab facility in June.
Combined with the recent selloff on worries that Tesla (TSLA) may use less silicon carbide in its vehicles, and less of an impact from legacy yield issues, there is opportunity for a “good setup” for investors, Mobley added.
In addition to NXP (NXPI) and Wolfspeed (WOLF), Mobley recommended investors buy Rambus (RMBS), noting product cycles for its DDR5 and CXL lines could boost its second-half sales.
For the broader semiconductor industry as a whole, Mobley said that when using the top 20 semiconductor companies as a measure, he estimates that industry sales, excluding memory chips, will drop by 3% this year.
However, estimates for the first-quarter assume an overall chip industry sales decline of 27% year-over-year, with memory, smartphone and PC chips performing the worst. However, that decline may already be factored in, as the Philadelphia Semiconductor Index’s price-to-earnings ratio is at a 6 times premium to the S&P 500 (SP500), a larger premium than in the past three years.
“Said differently, and perhaps more succinctly, the 30 companies comprising the [Philadelphia Semiconductor] index are viewed by the market as having a higher probability of upward [earnings-per-share] revisions when compared to the S&P 500, or the broader market,” Mobley said, adding investors are likely to be rewarded buying chip stocks when they are “expensive” and selling them when they are “cheap.”
Earlier this month, the Semiconductor Industry Association reported that chip sales were down 21% year-over-year through February.
Last month, Bank of America listed NXP Semiconductors (NXPI) as one of the top 20 stocks that benefit the most from rising rates.