By Philip Van Doorn
Additional stakes in companies with high returns on invested capital can broaden your exposure to the AI and semiconductor space
How should long-term stock market trends be dealt with? Investors have bet early on the long-term deployment of artificial intelligence across the corporate world, with a focus on data center infrastructure. Big bets were made on NVIDIA this year. The company’s stock has reinvested its dividends this year to return 189%.
On June 15, the company screened semiconductors and identified 16 industry players whose sales are expected to grow at a compound annual growth rate of at least 15% through 2025. Nvidia (NVDA) ranked fourth, but is now an expensive stock. Below is a screen shot of 60 manufacturers of computer chips and related hardware, showing the companies that have used their investment capital most efficiently over the past five years. This approach could be the starting point for your own research on equities that could broaden your exposure to AI developments.
too high?
First, let’s look at valuations. Here is NVIDIA’s year-to-date price chart through Friday.
The company’s shares soared 24% on May 25 after Nvidia predicted a 50% quarter-on-quarter revenue increase this quarter. That promise was tied to the adoption of the company’s graphics processors for AI computing in data centers.
Now let’s compare NVIDIA’s valuation to the S&P 500 and the iShares Semiconductor ETF (SOXX), which tracks the PHLX Semiconductor Index (SOXX) of 30 manufacturers of computer chips or related hardware.
Below are future price/earnings ratios based on 12-month weighted rolling consensus estimates among analysts surveyed by FactSet.
And the future price-to-sales ratio will be:
A few points about the rating chart:
Years later, we might look back and conclude that late June 2023 was still a good time to buy Nvidia stock, due to its high profitability and phenomenal growth trend. However, clairvoyance is lacking.
SOXX would be a reasonable way to jump on the AI/semiconductor trend while avoiding all eggs in Nvidia’s basket.
Alternatively, you can go beyond chip makers and target AI itself by investing in centralized ETFs that take a variety of approaches, including:
Semiconductor — ROIC Screen
Back to chipmakers and companies that manufacture the equipment they use or provide related services, starting with SOXX 30, Factset or the “Semiconductors and Semiconductor Equipment” Global Industry Classification Standards (GICS) group. (The S&P 1500 Composite Index is made up of the S&P 500, S&P 400 Mid Cap Index (MID), and the S&P Small Cap 600 Index.)
We then looked back at the last 20 fiscal quarters of reported companies’ return on invested capital and calculated a five-year average.
FactSet calculates a company’s return on invested capital (ROIC) as revenue divided by the sum of the book value (not market value) of the company’s common stock, preferred stock, long-term debt, and capitalized lease obligations. Define.
ROIC is most useful for comparing how well management is allocating investor money within a particular industry group. This is because some industries naturally have higher profit margins than others. It’s not a perfect measure, so it’s important to do your own research on whether the ROIC numbers make a company look attractive. For example, a company’s equity on its balance sheet may actually be negative, but it may not matter if it is profitable with good cash flow. However, it can skew ROIC.
We found that 4 of our 60 semiconductor companies had ROIC data available for less than 20 quarters.
Of the remaining 56 companies, 20 have an average ROIC of 15% or more (when rounded) over the last 20 quarters.
Company Ticker Avg. ROIC -- past 20 quarters Forward P/E Forward price/ sales Five-year total return Market cap. ($mil)
Texas Instruments Inc. TXN 38.47% 22.0 8.3 71% $152,195
Lam Research Corp. LRCX 33.29% 24.6 6.0 277% $81,781
KLA Corp. KLAC 31.01% 23.3 7.0 368% $62,693
Applied Materials Inc. AMAT 28.46% 19.6 4.8 202% $114,264
Teradyne Inc. TER 28.19% 29.3 5.6 178% $16,304
Qualcomm Inc. QCOM 26.49% 12.6 3.4 121% $126,361
ASML Holding NV ADR ASML 26.05% 31.6 9.4 252% $281,346
Nvidia Corp. NVDA 25.84% 50.7 22.9 579% $1,042,562
Taiwan Semiconductor Manufacturing Co. Ltd. ADR TSM 24.64% 18.0 6.3 202% $528,547
Advanced Micro Devices Inc. AMD 21.99% 32.1 7.2 596% $177,156
Skyworks Solutions Inc. SWKS 21.60% 11.7 3.4 13% $16,237
Monolithic Power Systems Inc. MPWR 20.27% 40.5 12.4 281% $23,996
Kulicke & Soffa Industries Inc. KLIC 18.86% 26.1 3.6 154% $3,154
Power Integrations Inc. POWI 17.87% 36.6 8.4 131% $4,981
STMicroelectronics NV ADR STM 17.72% 11.0 2.5 106% $42,314
Micron Technology Inc. MU 17.45% N/A 3.7 16% $71,442
Intel Corp. INTC 16.55% 32.4 2.6 -28% $137,643
Alpha and Omega Semiconductor Ltd. AOSL 15.94% 22.7 1.2 97% $822
Axcelis Technologies Inc. ACLS 15.90% 24.8 5.3 724% $5,511
SolarEdge Technologies Inc. SEDG 14.77% 21.4 3.1 387% $13,728
Source: FactSet
Click on the ticker to see details for each company, ETF and index.
For Tomi Kilgore’s in-depth guide to the wealth of information available for free on MarketWatch’s quotes page, click here.
There is no expected P/E for Micron Technology (MU) as the aggregate analyst consensus earnings per share forecast for Micron Technology (MU)’s future reported fiscal quarter is negative.
There is some correlation between high ROIC and total profit. Sixteen of these 20 companies have reinvested their dividends and outperformed the S&P 500 with a total return of 72% over the past five years. Meanwhile, 11 of them outperformed his SOXX’s five-year return of 176%.
You might be surprised to see Intel Corp. (INTC) on the list with an average ROIC of 16.55%. The company is the only company in the top 20 with negative five-year total returns. Intel is seeking a multi-year comeback, including setting up large chip foundry operations in the United States and other Western countries.
Keep in mind that ROIC is a useful tool as a first indicator of how efficiently a company is using its investors’ money. This is the first step in identifying companies worthy of further investigation as part of an effort to find companies that are likely to offer goods and services and remain competitive for at least the next decade.
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– Philip van Doorn
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(Closed) Dow Jones Correspondence
07-01-23 0841ET
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