The semiconductor industry is becoming more important to everyday life. It's responsible for manufacturing the advanced computer chips that power our most valued electronics, from smartphones to cars to refrigerators. As those products grow smarter, they require more advanced computing power than ever before.
Since semiconductor hardware is becoming more complex, quality control is increasingly crucial to the production process. That's where Cohu (COHU 0.85%) shines. Although its business cooled in 2022 after a red-hot 2020 and 2021, its long-term prospects are as attractive as ever.
With Cohu stock down 40% from its all-time high, here's why now is a great time to buy in at the discount.
NASDAQ: COHU
Key Data Points
Cohu serves a critical need
Consumers are constantly demanding more capabilities from their digital devices, and as a result, chips need to be more powerful while also shrinking in size to fit into smaller spaces. Not only does that create production challenges, but it also makes it difficult to manage quality control at scale.
Cohu's range of testing and handling equipment is designed to solve that problem. Its Neon system, for example, can inspect devices as small as 0.2 millimeters by 0.4 millimeters in size. Cohu has developed advanced technology for its systems, including artificial intelligence (AI), to detect defects in chip hardware that would otherwise be invisible to the naked eye. This increases the likelihood that the end user receives a fault-free product. By using AI, it can also determine whether defects are structural or simply visual, which prevents waste and increases production yield.
To further expand its product portfolio, Cohu recently acquired MCT Worldwide, which also makes test and handling automation equipment. It will expand Cohu's addressable market because MCT operates in segments that Cohu doesn't, like film-frame testing and laser marking. The acquisition is expected to start boosting Cohu's financial results from 2024 onward.
Cohu's financials contracted in 2022 following a strong run
When the pandemic struck in 2020, supply chains ground to a halt as manufacturing facilities across the world went into lockdown. Order backlogs continued to build, so when semiconductor producers resumed operations, they found themselves with mountains of work.
Many of them opted to increase their manufacturing capacity, so they tapped key equipment suppliers like Cohu because testing, handling, and inspection products were necessary to make that happen.
As a result, Cohu's revenue soared. For context, it generated $583 million in revenue during 2019, and by 2021, that figure had jumped by 52% to $887 million.
But the environment shifted in 2022. Not only did semiconductor supply chains recover, but they also ended up overproducing. At the same time, the global economic environment deteriorated and consumers were purchasing fewer big-ticket electronics. As a result, Cohu's revenue shrank by 8.3% compared to 2021, to $812 million.
The company did a good job managing costs, so it maintained profitability with $1.98 in earnings per share -- though that number was down 42% year over year.
Image source: Getty Images.
But it's the long-term that matters most
Cohu has provided investors with a mid-term financial model that projects it will generate $1 billion in annual revenue, on average, over the next three to five years. Additionally, it projects $4 in annual earnings per share over the same stretch of time.
It fits with the broader picture for the semiconductor industry, which some estimates suggest will grow from $573 billion in 2022 to more than $1.5 trillion by 2030. That's going to require a significant expansion of production capacity around the world, so Cohu should see steady long-term demand for its equipment.
The future looks bright, and Cohu stock is a great value right now. Based on its 2022 earnings per share of $1.98 and a current share price of roughly $35, it trades at a price-to-earnings (P/E) ratio of just 18. That's 28% cheaper than the 25 P/E of the Nasdaq-100 index, which is a widely followed benchmark for the technology sector.
But if Cohu manages to hit its mid-term earnings targets in the next couple of years, the stock will have looked like a complete bargain at its current price. Investors might wish they'd taken the opportunity to buy it today while it's trading at a 40% discount to its all-time high.
