3 Electronics Stocks to Watch From a Challenging Industry

The Zacks Electronics - Manufacturing Machinery industry participants are suffering from challenging macroeconomic conditions globally and continued high levels of inventory. However, industry players are benefiting from increased capital spending on high-performance computing, AI, mobility, augmented reality and virtual reality, advanced packaging, lithography and wet processing solutions by semiconductor manufacturers. The ongoing transformation in cloud computing is noteworthy. Kulicke and Soffa Industries KLIC, Axcelis Technologies ACLS and Veeco Instruments VECO are gaining from the above-mentioned trends. These companies provide solutions to semiconductor manufacturers and OEMs. Strength in cloud & data centers, healthcare and automotive has been the key catalysts for these industry participants.

Industry Description

The Zacks Electronics - Manufacturing Machinery industry comprises companies that provide a range of solutions to address the needs of wafer processing facilities, as well as device packaging and test facilities, and semiconductor manufacturing processes. The solutions offered by the industry participants include thin-film processing systems, photonics, process-control tools (that perform macro defect inspections and metrology), metal-organic chemical vapor deposition, advanced packaging lithography, wet etch and clean, laser annealing and 3D wafer inspection systems. A few industry participants also offer micro-contamination control products and advanced material-handling solutions. Notably, contamination-free transportation, storage and delivery of materials have gained immense significance in recent times.

3 Trends Shaping the Future of the Electronics Industry

Miniaturization Enhances Prospects: Industry participants are benefiting from the ongoing transition in semiconductor manufacturing technology. The demand for advanced packaging, which enables the miniaturization of electronic products, remains strong. The consistent shift to smaller dimensions and the rapid adoption of new device architecture like FinFET transistors and 3D-NAND, along with the increasing utilization of new manufacturing materials to increase transistor and bit density, are driving the demand for solutions provided by the industry players. Moreover, the emergence of techniques like wafer-level packaging is driving the need for a high-purity manufacturing environment free of contaminants. The rising demand for clean processing, as well as wafer carrier cleaning and conditioning tools, is a key catalyst for industry participants.

Complex Process Driving Demand: The requirement for faster, more powerful and energy-efficient semiconductors is expected to increase rapidly with the robust adoption of cloud computing, IoT and AI. Semiconductor manufacturers like Intel, Samsung and Taiwan Semiconductors are primarily looking to maximize manufacturing yields at lower costs. This is making semiconductor manufacturing processes more complex and driving the demand for solutions offered by industry participants. The rapid adoption of IoT-supported factory automation solutions is another contributing factor. The increasing deployment of 5G and the growing demand for edge computing are other key catalysts.

NAND, DRAM & SSD Demand Strong: The improving demand for NAND and DRAM is a positive for the industry participants. Strong SSD demand, driven by data center and cloud spending, is another key catalyst. DRAM is expected to benefit from strong demand in the data center, enterprise and cloud segments. Strong demand for chips and higher spending on semiconductor capital equipment are aiding the industry participants.

Zacks Industry Rank Indicates Bearish Prospects

The Zacks Electronics - Manufacturing Machinery industry is housed within the broader Zacks Computer and Technology sector. It carries a Zacks Industry Rank #234, which places it in the bottom 5% of more than 250 Zacks industries.

The group’s Zacks Industry Rank, which is the average of the Zacks Rank of all the member stocks, indicates bearish near-term prospects. Our research shows that the top 50% of the Zacks-ranked industries outperform the bottom 50% by a factor of more than two to one.

The industry’s position in the bottom 50% of the Zacks-ranked industries is a result of the positive earnings outlook for the constituent companies in aggregate. Looking at the aggregate earnings estimate revisions, analysts appear pessimistic about this group’s earnings growth potential. Since Oct. 31, 2024, the industry’s earnings estimate for 2025 has decreased by 33.8%.

Given the bearish industry outlook, there are only a few stocks worth watching. However, before we present the stocks you may want to consider for your portfolio, let’s take a look at the industry’s recent stock-market performance and valuation picture.

Industry Lags Sector and S&P 500

The Zacks Electronics - Manufacturing Machinery industry has underperformed the broader Zacks Computer and Technology sector and the S&P 500 over the past year.

The industry has declined 47.2% over this period against the S&P 500’s growth of 6.7% and the broader sector’s increase of 2.8%.

One-Year Price Performance

Industry's Current Valuation

On the basis of the trailing 12-month EV/EBITDA ratio, which is a commonly used multiple for valuing Electronics - Manufacturing Machinery companies, we see that the industry is trading at 9.59X compared with the S&P 500’s 15.82X. It is below the sector’s trailing 12-month EV/EBITDA of 14.68X.

Over the last five years, the industry has traded as high as 19.03X and as low as 8.16X, with the median being 12.39X, as the charts below show.

EV/EBITDA Ratio (TTM)

3 Electronics Stocks to Watch Right Now

Kulicke and Soffa Industries: This Zacks Rank #3 (Hold) company designs, develops, manufactures and sells capital equipment and consumables and provides services used to assemble semiconductor and electronic devices, such as integrated circuits, power discretes, light-emitting diodes, advanced displays and sensors. You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

Headquartered in Fort Washington, PA, Kulicke and Soffa’s latest Fluxless Thermo-Compression (FTC), which comes in a new dual-head configuration, provides nearly twice the throughput compared with its existing FTC system. This new FTC system is expected to win advanced logic customers and extend footprint into the High-Bandwidth-Memory market. 

The Zacks Consensus Estimate for KLIC’s fiscal 2025 earnings has been unchanged at $1.49 per share over the past 30 days. Shares have declined 35.4% year to date.

Price and Consensus: KLIC

Axcelis Technologies: This Zacks Rank #3 company designs, manufactures and services ion implantation and other processing equipment used in the fabrication of semiconductor chips.

Headquartered in Beverly, MA, Axcelis is benefiting from robust demand for ion implantation systems in the silicon carbide market. Demand for silicon carbide applications remains strong as customers continue to expand capacity to meet the domestic production goals of the EV market.

The Zacks Consensus Estimate for Axcelis’ 2025 earnings has been steady at $2.55 per share over the past 30 days. Shares have declined 32% year to date.

Price and Consensus: ACLS

Veeco Instruments: This Zacks Rank #3 company is expected to benefit from improving demand for its LSA system. VECO is benefiting from strong laser annealing revenues and wet processing.

The Zacks Consensus Estimate for Veeco Instruments’ 2025 earnings has been steady at $1.35 per share over the past 30 days. Shares have dropped 28.2% year to date.

Price and Consensus: VECO
 

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This article originally published on Zacks Investment Research (zacks.com).

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