Important development and margin expansion opportunities arise from increasing sales in the smartphone and tablet processor market, which provide higher royalty earnings over each processor than the PC market. Morningstar analysts estimate an annual revenue CAGR of 18% over the next five years for this company.
Some other financials also look encouraging, as operating margin has been expanding for over four years, reaching an impressive 36.1%. This margin is not only wider than the ones offered by 99% of the 164 companies in the industry, way above the 2.15% sector median, but also the highest in the firm’s history. Same can be said about the remaining profitability and growth ratios, as ARM Holdings plc (ADR) (NASDAQ:ARMH), ranks higher than 99% of its 164 peers in net margin, return on equity, return on assets, return on capital and revenue, EBITDA, and EPS growth ratios (see table below).
Notwithstanding the fact that ARM Holdings plc (ADR) (NASDAQ:ARMH), has solid financials and growth prospects, Morningstar analysts assure that the company’s dominance is “locked up just yet” as the stock price assumes the bullish scenario in which ARM Holdings plc (ADR) (NASDAQ:ARMH), surpasses Intel (or at least takes an important share of its customers) in the mobile, PC, and server market.
An emerging market play
Also, among Intel´s competition, Taiwan Semiconductor Mfg. Co. Ltd. (ADR) (NYSE:TSM), the world’s largest contract chip foundry with almost half of the market share (Gartner), is a
as well. For Zacks, it’s a #2-Buy rank, same as for most of Barron´s analysts; The Wall Street Journal consensus suggests an overweight rating on the stock.
Since individual chipmakers cannot afford the manufacturing and only dedicate to design, growing foundry demands have driven TSMC´s profit. Although competition in the segment is also increasing due to low entry barriers, the company focuses on the cutting-edge and high-tech part of the segment, in which most of its peers can’t compete.
This makes Taiwan Semiconductor Mfg. Co. Ltd. (ADR) (NYSE:TSM) the most profitable firm in the industry, with over $16 billion in revenue (ttm) and more than $5.5 billion in net income (ttm). Profitability and growth ratios beat 99% of competing firms as well.
The chipmaker´s high exposure to the mobile phone market and growing demand has pushed up its earnings 18% in Q1 to $1.3 billion. It has also been reported that
TSMC is manufacturing the chips designed by
for its new iPhones and iPads.
However, some risks should be taken into account. For starters, the semiconductor business requires huge capital investments in order to meet the increasing demand, which makes it extremely susceptible to demand cycles. Taiwan Semiconductor Mfg. Co. Ltd. (ADR) (NYSE:TSM) is not an exception to this trend, as its financial results have tended to follow the oscillations in the broader foundry industry. In addition, increased competition, especially from
GlobalFoundries, a spin-off from
Advanced Micro Devices,
and Samsung threaten Taiwan Semiconductor Mfg. Co. Ltd. (ADR) (NYSE:TSM)´s market dominance.
The significant growth in the mobile tech sector has opened up a new set of opportunities for chipmakers. Although Intel might be the best-known company among the above, ARM Holdings plc (ADR) (NASDAQ:ARMH), and, especially, Taiwan Semiconductor Mfg. Co. Ltd. (ADR) (NYSE:TSM) look interesting avenues for investment.
The article 3 Leading Semiconductor Stocks to Watch originally appeared on Fool.com and is written by Victor Selva.
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