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2 Semiconductor-Service Growth Stocks to Own Now

If you've tried to buy a car this year, you're probably aware of the inventory shortage for the auto industry and the soaring prices that shortage has created. The pandemic caused a wave of supply-chain disruptions across the world, but few have been as impactful as those experienced by semiconductor producers. As cars and computers have become increasingly intelligent, the need for more advanced chips has placed mounting pressure on manufacturers.

Behind the scenes, companies that exist solely to serve these producers are doing record business. Cohu (NASDAQ: COHU) and Axcelis Technologies (NASDAQ: ACLS) are two semiconductor-service specialists providing manufacturing equipment, testing technology, and even training to help producers meet demand. The growing need for advanced computing isn't going away, so both of these profitable companies could make great additions to your portfolio. Let's find out a bit more about these two companies.

Image source: Getty Images.

1. Cohu

Building the technologies that power everyday devices can be incredibly complex. Hosting all of the necessary processes in-house is too expensive for many manufacturers, so outsourcing to reliable third parties is a critical practice.

Cohu fills many important needs through its comprehensive testing and inspection capabilities. Think about the growing number of sensors in electric vehicles, for example, that autonomously monitor performance and safety. The company provides testing solutions that put those mechanisms through real-world scenarios to ensure reliability when they reach the consumer.

Cohu's expertise extends far beyond the automotive industry -- it also covers the technical components associated with mobility (5G), data centers, and cloud computing -- and even the medical industry. The company just posted two consecutive profitable quarters after years of investment into research and development, plus Q1 2021 revenue growth of 62% (year over year).

Metric

Q1 2020

Q1 2021

Revenue

$138.9 million

$225.4 million

Earnings/(loss) per share

($0.42)

$0.61

Data source: Company filings.

Sales are growing fastest in the Asia-Pacific region, with Q1 revenue higher by 131% in Taiwan alone -- one of the most important semiconductor-producing nations.

According to Yahoo! Finance, analysts estimate Cohu will generate 2021 full-year earnings per share of $3.12 -- and after posting a loss in 2020, this is a strong turnaround. Additionally, the $911 million in expected 2021 revenue represents 43% growth compared to 2020.

With a current share price of $32.93, Cohu trades at just 10.5 times projected 2021 earnings and less than two times 2021 revenue. Compared to the iShares PHLX Semiconductor ETF, which trades at over 37 times earnings, Cohu might represent an excellent value going forward.

2. Axcelis Technologies

Axcelis has recently placed particular focus on the launch of its Purion H200 high-current implanter -- part of its ''power device'' line -- specifically designed for the semiconductors used in the automotive industry. Ion implanters are highly specialized machines used in the semiconductor fabrication process.

Thanks to modern and smarter cars, demand for vehicle-related chips is soaring. But the Purion line has also been a contributor to improving gross margins -- so it's a more profitable segment for the company, too.

Metric

Q1 2020

Q1 2021

Revenue

$118.9 million

$132.7 million

Product gross margins

40.1%

44.4%

Earnings per share

$0.33

$0.48

Data source: Company filings.

The company has been consistently profitable, but growth has recently accelerated. In 2019, it earned $0.50 per share for the full year. By comparison, it has almost hit that mark in Q1 2021 already.

Full-year 2021 earnings are expected to be $1.95 per share, nearly four times higher than the 2019 figure. Analysts also estimate $2.58 in earnings per share in 2022, representing 30% growth on the 2021 figure if the company delivers. With the stock trading at 17.6 times 2021 earnings, it's more expensive than Cohu but has a better track record of profitability.

Axcelis manufactures its service equipment in the U.S., but over 90% of its sales are derived offshore. It's in line with global numbers, which suggest that 60% of semiconductor sales are made in Asia alone.

The downside is that one undisclosed customer currently accounts for 29.6% of the company's total sales. If that customer is in Taiwan or China, for example, geopolitical events could seriously impact its earnings potential.

Investor takeaway

By most metrics, both Axcelis and Cohu are cheap. Whether they're measured against their peers in the industry or the broader market, it's difficult to find profitable companies right now that are reasonably priced and growing at their pace. As demand for complex semiconductors continues to climb, the services these companies provide will be increasingly important -- making for a great opportunity for investors.

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Anthony Di Pizio has no position in any of the stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.


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