On the one hand, the semiconductor sector appears to be one of the more robust sectors to consider investing in this year. A study done earlier this year by audit house KPMG characterized industry confidence as “exceedingly high.” They expect wireless communications, automotive and internet of things to be the markets that most drive sector strength. But while they expect the sector to be strong, a combined 56% of respondents see the shortage ending by early 2023.
That brings up the possibility that overproduction to meet high demand could lead to a supply glut in late 2022 or 2023. Gokul Hariharan, a leading industry researcher with J.P. Morgan believes that there could be oversupply as well. He sees the possibility of slight revenue declines as a consequence.
With that in mind, let’s take a closer look at the following semiconductor stocks to avoid.
| Ticker | Company | Current Price |
| SWKS | Skyworks Solutions | $90.20 |
| FSLR | First Solar | $68.14 |
| LRCX | Lam Research | $399.22 |
| QRVO | Qorvo | $91.31 |
| MU | Micron | $52.28 |
| TXN | Texas Instruments | $149.58 |
| AWRE | Aware | $2.36 |
Skyworks Solutions (SWKS)
When Skyworks Solutions (NASDAQ:SWKS) recently reported earnings in May its stock fell on what it characterized as softness in China. That softness led the company to issue weaker-than-expected guidance moving forward.
It’s the firm’s earnings-per-share guidance that is causing concern. Skyworks Solutions has pegged it at $2.36 per share; whereas, Wall Street had been expecting $2.40 per share in the third quarter. The company expects revenue to range between $1.2 billion to $1.26 billion which is generally in line with the $1.24 billion analysts expect.
Otherwise, Skyworks Solutions performed as expected with EPS and revenue figures in line with Wall Street consensus figures.
The blame is being cast on strict lockdowns in China and the inability of original equipment manufacturers to supply the company. However, some analysts see that the problem predated lockdowns.
If that isn’t enough, its biggest customer, Apple (NASDAQ:AAPL), is moving chip production in-house.
First Solar (FSLR)
First Solar (NASDAQ:FSLR) is a company that designs, manufactures, markets, and distributes solar power systems and solar power modules. That doesn’t exactly sound like a semiconductor company, right? But given that its solar power modules include significant semiconductor technology, an alternative to traditional crystalline silicon PV modules, it is a chip firm.
Beyond that explanation though, the reason to be very cautious of FSLR stock is primarily that it performed so weakly in the first quarter of 2022. Sales declined 54%, falling from $803.37 million to $367.04 million on a year-over-year basis.
The company also recorded a $209.67 net income in Q1 2021, but suddenly reported a $43.25 million net loss a year later. The company did state at that time that prior guidance remained unchanged for the remainder of 2022, but that seems very risky.
Lam Research (LRCX)
Lam Research (NASDAQ:LRCX) stock appears to have massive upside based on simple arithmetic around its ratings and current price levels. It currently trades around $400 and carries an average target stock price of $624.97. But I would hesitate to put any capital behind that simple analysis because things are rapidly souring for the firm. Anticipated EPS figures, which sat at $8.35 per share for Q4 three months prior, have now declined to $7.33 per share.
That alone is worrisome. Another reason to avoid it relates to the geographic distribution of its revenue base. In the most recent quarter, 31% of revenues came from China which, as we know, has been affected by lockdowns which are further exacerbating supply chain issues.
No one knows how the effects of lockdowns will play out, but given that Lam Research only saw modest revenue increases in its most recent quarter it makes sense to err on the side of caution as there are many semiconductor stock alternatives to consider.
Qorvo (QRVO)
Qorvo (NASDAQ:QRVO) stock is plagued by the same EPS troubles as Lam Research. Both are troubled by expected figures which are headed in the wrong direction. In Qorvo’s case, the pattern holds true for each of the next two quarters. Over the last three months EPS expectations have fallen from $2.80 per share to $2.12 per share in Q2, and from $3.53 per share to $2.70 per share in the third quarter.
Qorvo’s revenues have only increased very modestly, rising by 4.1% in the most recent quarter. However, the company remains troubled by supply chain issues. Those issues partially explain why, despite the 4.1% increase in revenues, Qorvo’s net income dropped nearly 29% in the same quarter.
The company was among the worst hit by supply chain snags. That should really make investors hesitate before buying shares in Qorvo.
Micron (MU)
An article in Barron’s best describes why investors should avoid Micron Technology (NASDAQ:MU) stock right now. Companies that get downgraded rarely attract investor capital. As such, stocks that get downgraded multiple times in a short span of time are even less likely to attract investor capital. Given that MU stock recently received its second downgrade in less than two weeks investors should avoid it.
Micron Technology is primarily a memory chip maker. The overall news in that particular industry is worsening, catalyzing those successive downgrades. Summit Insights’ Kinngai Chan lowered his rating to hold based on expectations that memory market dynamics are no longer expected to improve this year.
Data center demand has been relatively strong in the memory market, but a decline in PC and smartphone demand is tipping the balance negative. Therefore, Micron Technology is one to avoid despite its seeming cheap price.
Texas Instruments (TXN)
Texas Instruments (NASDAQ:TXN) stock is among the better choices on this list, I’ll give it that much. That said, it looks to remain flat for some time. It’s essentially a middling player in the semiconductor space, which means investor demand is more likely to move toward the bigger names.
There are certain aspects of the company that are admirable. In the first quarter, revenues increased 14% on a year-over-year basis, while income rose an even better 26%. And when TI gave guidance in April, it stated that EPS should be in the range of $1.84 per share to $2.26 per share. Right now, the firm is holding steady at $2.10 per share, so that’s arguably a positive as well.
However, it doesn’t look like Texas Instruments has much of a chance to beat expectations in Q2. That is something it did in the two quarters prior. Ultimately, here are more interesting semiconductor names out there.
Aware (AWRE)
Investors should steer clear of Aware (NASDAQ:AWRE) stock because, despite its rapidly growing revenue base, the timing is wrong. Yes, Aware did post massive 79% Q2 revenue growth on a year-over-year basis.
That increase brought revenues to $2.97 billion in the quarter. It was an impressive result. But the problem is that growth is slowing per company guidance. In the coming quarter, the company expects midpoint revenues to reach $3.05 billion. That’s hardly going to interest investors on the heels of the massive growth in the previous quarter.
The company deals in biometrics software and services. Despite its current promise, it will have to establish a more prominent name for itself before investors should consider it. Investors won’t be interested to see revenue growth slow significantly moving forward, which is the main reason to shy away.
On the date of publication, Alex Sirois did not have (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.