Macro, Geopolitics Limit 2024 Semiconductor Growth: 2 Stocks

Industry Overview - The analog/mixed signal semiconductor market is expected to strengthen through year-end 2023, driven by reduced inventories in computing and smartphone markets [1] - The World Semiconductor Trade Statistics (WSTS) projects double-digit growth in semiconductors for 2023, with memory demand increasing by 76.8% and logic demand by 10.7% [1] - The semiconductor industry is cyclical, with players often serving multiple markets to offset individual seasonality [3] Growth Prospects - The semiconductor market is forecasted to grow by 17.4% in 2024, with memory demand rebounding by 70.5% after a weak 2023 [4] - The automotive chip demand is expected to grow by 13.2% in 2024, with a CAGR of 11.8% from 2024 to 2028 [4] - AI is a significant driver for growth, with AI chip revenue projected to grow by 33% this year [4] Market Challenges - The industrial end market remains sluggish despite long-term growth prospects due to macroeconomic and geopolitical uncertainties [2][5] - High interest rates in the U.S. are leading to lower investments in manufacturing, impacting employment numbers [5] - Geopolitical tensions, particularly between the U.S. and China, pose risks to the semiconductor supply chain [7] Current Valuation and Performance - The Zacks Semiconductor – Analog and Mixed industry ranks 220, indicating weak near-term prospects [8] - The industry has gained 18.3% over the past year, compared to 30.3% for the broader sector and 24.9% for the S&P 500 [10] - The industry currently trades at a forward P/E ratio of 29.1X, which is a premium to the S&P 500's 21.7X but a discount to the broader technology sector's 26.1X [11] Company Insights - Analog Devices, Inc. (ADI) is well-positioned for long-term growth, with a strong product development pipeline and customer engagement [12][13] - ADI's earnings estimates for fiscal 2024 have increased by 1.4%, while 2025 estimates have decreased by 6.6% [13] - Magnachip Semiconductor Corp. (MX) has seen a return to growth in its Power Solutions business, with improvements across various markets [16][17] - MX's earnings beat the Zacks Consensus Estimate by 34.4% in the last quarter, but the company faces a projected decline in revenue and earnings for 2024 [18]