The global semiconductor industry is expected to hit $600 billion this year and $1 trillion by 2030. Driven largely by automotive, computing, and wireless applications, the growth of the semiconductor industry shows no signs of slowing down soon.
The chip shortage of the past two years caused an estimated $500 billion in missed sales, at least $210 billion in the automotive industry alone. Pent-up demand for microchips, combined with the mass adoption of such technology as artificial intelligence (AI) and electric vehicles (EVs), means major growth potential for semiconductor producers.
To best position themselves for the semiconductor revolution, investors should pay close attention to the players involved. Let's take a look at two small-cap American semiconductor stocks, which have both taken a beating this year but yet have great long-term potential.
1. SkyWater Technology
SkyWater Technology (SKYT +4.54%) manufactures semiconductors that serve a host of applications, including aerospace, defense, automotive, healthcare, cloud computing, consumer, industrial, and the internet of things (IoT).
The company operates a 91,000-square-foot clean room in its Bloomington, Minnesota, headquarters, as well a second facility in Kissimmee, Florida, that is roughly a third the size.
As the only U.S.-owned and U.S.-operated pure-play silicon foundry, SkyWater holds a unique advantage in the American aerospace and defense industries. Last month, the Department of Defense awarded SkyWater up to $99 million as part of an ongoing electronics initiative.
NASDAQ: SKYT
Key Data Points
With the stock now down more than 80% from its highs last year, investors likely want to know if this massive dip is worth buying.
SkyWater's second-quarter results suggested a mixed performance. While the chipmaker saw a 15% year-over-year increase in sales, operating expenses outweighed revenue and net earnings were a loss.
Nevertheless, CEO Thomas Sonderman affirmed his confidence in SkyWater's "increasing momentum" toward margin expansion and profitability. Long-term, the company anticipates an ambitious annual growth rate of 25%.
2. SMART Global Holdings
SMART Global Holdings (SGH +8.37%) designs and manufactures semiconductors for cloud computing, memory systems, LED lighting, and other technologies like AI and IoT. The Milpitas, California-based company operates a network of facilities in the U.S., Europe, Asia, and Latin America.
The stock hit an all-time high north of $37 on the very first trading day of 2022, and has since plummeted more than 65%. So is it time to buy the dip? Let's take a look at recent results.
In its recently closed-out fiscal 2022 fourth quarter, the company endured a 6% year-over-year drop in sales and a 150 basis point contraction in its gross margin. However, earnings per share (EPS) saw a $0.01 increase. Citing near-term headwinds, the company recently lowered and broadened its first-quarter 2023 earnings-per-share guidance, expecting EPS now in a range of $0.45 to $0.75 versus the previous estimate of $0.76.
NASDAQ: SGH
Key Data Points
Although Q4 was disappointing, the chipmaker enjoyed a remarkably strong fiscal 2022 overall. Net sales were up 21% versus 2021. And the gross margin was up nearly 24% in 2022, helping the company's earnings per share to almost triple. Coming off such a remarkable year, SMART Global must now keep its momentum to retain and attract shareholders.
Image Source: Getty Images.
Which semiconductor stock is the better buy?
To determine which of these semiconductor stocks makes the better buy, let's compare price-to-sales ratios. Based purely on revenue, the price-to-sales ratio can indicate whether a company is undervalued or overpriced -- the lower, the better.
| Metric | SkyWater Technology | SMART Global Holdings |
|---|---|---|
| Market capitalization | $277.9 million | $632.1 million |
| Price-to-sales ratio | 1.64 | 0.65 |
Data sources: E*Trade, quarterly earnings reports.
A much lower price-to-sales ratio makes SMART Global today's winner. But in an industry poised for steady growth, both of these beaten-down semiconductor stocks could see significant recovery in the years to come. Small-cap companies can sometimes present substantial opportunities -- for investors patient enough to ride out the storms.
