During an age where we can browse the internet on our refrigerators, semiconductors have become the single most important manufacturing component in a growing number of industries. But…
the pandemic triggered a global shortage of semiconductors, crippling the production of many consumer goods including big-ticket items like cars. The supply constraints have caused prices to rise materially, and major automakers expect that to continue well into 2022.
The semiconductor shortage spells opportunity for semiconductor-service powerhouse Cohu (NASDAQ:COHU), which is already delivering soaring growth. Wall Street firm Rosenblatt Securities thinks the stock could rise 97% from current levels.
Cohu has a growing opportunity
While the semiconductor supply constraints are hitting consumers’ wallets, they’ve allowed semiconductor producers to charge higher prices and increase profit margins. Investors have noticed this trend, sending the iShares Semiconductor ETF 69% higher this year — far outpacing its five-year average return of 38% per year.
These producers are in the process of expanding their manufacturing capacity to alleviate constraints and meet growing demand, and that’s where Cohu stands to benefit. As a provider of critical semiconductor testing and handling equipment, in addition to training and education services for manufacturers, Cohu is an essential part of that equation.
The automotive sector is a core focus for the entire semiconductor industry right now because it’s having the most significant economic impact on consumers. According to the most recent survey of consumer sentiment by the University of Michigan, just 38% of consumers thought it was a good time to purchase a car — the lowest reading in 12 months.
It’s because major brands like Toyota, Ford Motor Company, and Volkswagen are producing fewer new cars, specifically because they can’t get the chips they need. As a result, dealerships in the U.S. have seen a collapse in new vehicle inventories, falling as much as 80% in some cases. Used car prices are soaring because people are forced into that market instead.
Aligning the company’s focus with the broader semiconductor industry, Cohu’s automotive segment has grown to become 18% of overall revenue, making it the company’s largest. The semiconductor market size for this one segment alone should surpass $50 billion in 2021, so Cohu’s strategic shift could reap big rewards.
Accelerating revenue growth, and a return to profitability
Cohu has grown its revenue by a respectable 26% compound annual rate since 2016, so it has a bankable track record of operating performance. But there’s a clear uplift so far this year thanks to the semiconductor shortage, as its customers race to buy more of its equipment and services.
Cohu attributes the above-trend growth to its line of specialized automotive-related testing and handling equipment, which it says continues to attract new customers. The company’s Neon inspection system is one of the main…
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