As the chip industry continues to suffer from supply chain constraints and other macroeconomic headwinds, such as high material inflation and rising interest rates, industry players are struggling to meet the growing demand for chips. So, fundamentally weak chip stocks Entegris, Inc. (ENTG), Wolfspeed, Inc. (WOLF), and indie Semiconductor, Inc. (INDI) could be best avoided now. Let’s discuss this in detail.
Although there is high demand for chips with their growing applications across various sectors, supply chain issues have been and continue to be a major challenge for the semiconductor industry. Amid supply-and-demand mismatches for chips, manufacturers in sectors including automotive, consumer goods, and technology are feeling the pinch as their production grinds to a halt, jeopardizing their profits.
Among geopolitical issues, the impact of the nationalization of semiconductor technology is the most concerning to chip executives since it has implications for supply chains, talent acquisition, and access to government subsidies (for instance, the enacted CHIPS Act). Other major geopolitical woes include tariffs, trade agreements, the long-term effects of the Russia-Ukraine war, and Taiwan's prominence in the supply chain.
With supply chain issues likely to remain, growth in manufacturing capacity is expected to stay patchy until at least 2026, McKinsey analysis shows. The global semiconductor capacity grew at 7.6% annually from 2015 to 2022. However, the growth is expected to slow down to 4.9% per year from 2022 to 2026. Also, amid various macroeconomic challenges, chip industry revenues are projected to drop by 3-4% in 2023.
Investors’ lack of interest in chip stocks is evident from the Direxion Daily Semiconductor Bear 3X Shares ETF’s (SOXS) 67.7% decline over the past six months. Amid this backdrop, it could be wise to avoid chip stocks ENTG, WOLF, and INDI, which are still struggling with supply chain issues.
Let's take a closer look at these stocks now.
Entegris, Inc. (ENTG)
ENTG supplies advanced materials and process solutions for the semiconductor and other high-technology industries. The company operates through three segments, Specialty Chemicals and Engineered Materials; Microcontamination Control; and Advanced Materials Handling.
ENTG’s latest annual report highlights several risks that could significantly harm its financial condition. These include supply chain risks, the impact of its indebtedness, the volatility of its common stock price, and provisions in its charter documents and Delaware law that could potentially hinder or delay the company’s acquisition.
ENTG’s trailing-12-month gross profit margin of 42.55% is 15.9% lower than the 50.56% industry average. Its trailing-12-month levered FCF margin of negative 15.37% compares to the 6.59% industry average. Furthermore, the stock’s trailing-12-month asset turnover ratio of 0.49x is 19.2% lower than the 0.61x industry average.
For the fourth quarter that ended on December 31, 2022, ENTG’s cost of sales increased 59.2% year-over-year to $541.55 million. Its operating income decreased 9.9% from the year-ago value to $143.78 million. Also, the company’s non-GAAP net income and non-GAAP EPS declined 5.6% and 13.5% year-over-year to $124.45 million and $0.83, respectively.
Analysts expect ENTG’s EPS to decline 50.8% year-over-year to $0.52 for the first quarter that ended March 2023. The company’s EPS for the current quarter (ending June 2023) is expected to come in at $0.58, down 42.3% year-over-year. The stock has slumped 36.4% over the past year to close the last trading session at $72.94.
ENTG’s weak fundamentals are reflected in its POWR Ratings. It has an overall F rating, equating to a Strong Sell in our proprietary rating system. The POWR Ratings are calculated by considering 118 different factors, each weighted to an optimal degree.
The stock has a D grade for Value, Stability, and Quality. It is ranked #90 out of 91 stocks within the Semiconductor & Wireless Chip industry.
Click here to see the other ratings of ENTG (Growth, Sentiment, and Momentum).
Wolfspeed, Inc. (WOLF)
WOLF develops silicon carbide and gallium nitride (GaN) technologies for power and radiofrequency (RF) applications. The company's product families comprise silicon carbide and GaN materials, power devices, and RF devices designed for diverse applications.
On January 25, the company released a disappointing business outlook. For the third quarter of the fiscal year 2023, WOLF expects non-GAAP net loss to be in the $15 million- $20 million range, or $0.12-$0.16 per share.
The stock’s trailing-12-month gross profit margin of 33.15% is 34.4% lower than the 50.56% industry average. Its trailing-12-month net income margin and levered FCF margin of negative 17.30% and 44.17% compare to the industry averages of 2.61% and 6.59%, respectively.
For the fiscal 2023 second quarter that ended December 25, 2022, WOLF’s cost of revenue increased 28.5% year-over-year to $149.20 million. Its total operating expenses increased 34.2% from the year-ago value to $158.20 million. Also, the company’s operating loss widened 49.9% year-over-year to $91.30 million.
As of December 25, 2022, WOLF’s long-term liabilities stood at $3.10 billion, compared to $1.09 billion as of June 26, 2022.
Analysts expect WOLF to report a loss per share of $0.15 for the third quarter that ended March 2023. Similarly, the company’s loss per share is expected to come in at $0.12 for the ongoing quarter (ending June 2023). Shares of WOLF have plunged 42% over the past six months to close the last trading session at $59.71.
WOLF’s bleak outlook is reflected in its overall F rating, equating to a Strong Sell in our POWR Ratings system. It has an F grade for Sentiment and Quality and a D for Value and Stability. The stock is ranked last in the 91-stock Semiconductor & Wireless Chip industry.
Click here to access WOLF’s rating for Growth and Momentum.
indie Semiconductor, Inc. (INDI)
INDI provides automotive semiconductors and software solutions to Advanced Driver Assistance Systems (ADAS), autonomous vehicles, in-cabin user experience, and electrification applications. The company focuses on edge sensors that cover multiple modalities, including light detection and ranging, radar, ultrasound, and computer vision.
INDI's latest annual report flags various risks that could materially affect its financial stability. These comprise historical and future losses, insufficient funds for debt repayment and 2027 note repurchase, geopolitical uncertainty that could disrupt the supply chain, and the risk of unexpired warrants being redeemed at unfavorable times.
INDI’s trailing-12-month gross profit margin of 45.40% is 10.2% lower than the 50.56% industry average. Its trailing-12-month EBITDA margin of negative 94.15% compares to the 8.83% industry average. Moreover, the stock’s trailing-12-month asset turnover ratio of 0.21x is 66.1% lower than the 0.61x industry average.
For the fourth quarter that ended December 31, 2022, INDI’s non-GAAP operating loss widened 18.9% year-over-year to $15.07 million. Its non-GAAP net loss worsened by 13.5% from the year-ago value to $14.44 million, while its non-GAAP net loss per share stood at $0.10. As of December 31, 2022, the company’s total liabilities were $292.53 million, compared to $179.03 million as of December 31, 2021.
Analysts expect INDI to report a loss per share of $0.11 for the first quarter that ended March 2023. Likewise, the company’s loss per share is expected to come in at $0.09 for the second quarter ending June 2023. Over the past month, the stock has plummeted 19.7% to close its last trading session at $8.70.
INDI’s POWR Ratings reflect this poor outlook. The stock has an overall D rating, which equates to Sell in our proprietary rating system.
INDI has an F grade for Stability and a D for Growth, Quality, and Sentiment. It is ranked #87 out of 91 stocks within the same industry.
In addition to the POWR Ratings I’ve highlighted, you can see INDI’s ratings for Value and Momentum here.
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ENTG shares were trading at $70.34 per share on Tuesday afternoon, down $2.60 (-3.56%). Year-to-date, ENTG has gained 7.38%, versus a 7.33% rise in the benchmark S&P 500 index during the same period.
About the Author: Aanchal Sugandh
Aanchal's passion for financial markets drives her work as an investment analyst and journalist. She earned her bachelor's degree in finance and is pursuing the CFA program. She is proficient at assessing the long-term prospects of stocks with her fundamental analysis skills. Her goal is to help investors build portfolios with sustainable returns.
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