2 Small-Cap Chip Stocks to Buy in December

Rising investments to address the global semiconductor chip shortage by scaling up production, and increasing demand for chips from several industries, should propel the semiconductor industry's growth. So, we think it could be wise to bet on quality small-cap stocks Cohu Inc. (COHU) and Alpha and Omega Semiconductor (AOSL). Read on.

While the global chip shortage has impacted several sectors' output over the past year, global semiconductor sales grew in the third quarter.  Indeed, according to the Semiconductor Industry Association (SIA), global semiconductor sales climbed 27.6% year over year and 7.4% sequentially to $144.8 billion in the third quarter of 2021.

The increasing use of the internet of things (IoT), 5G, artificial intelligence (AI), and electric vehicles (EVs) is expected to continue driving the demand for semiconductor chips. According to IDC, the semiconductor market is expected to grow by 17.3% in 2021. Furthermore, most companies in this space are ramping up their production to meet the rising demand.

Thus, we believe quality small-cap chip stocks Cohu Inc. (COHU) and Alpha and Omega Semiconductor Limited (AOSL) could be solid bets now.

Click here to checkout our Semiconductor Industry Report for 2021

Cohu Inc. (COHU)

With a market capitalization of $1.58 billion, COHU in Poway, Calif., operates semiconductor test and inspection equipment and printed circuit board (PCB) test equipment in China, the United States, Taiwan, Malaysia, the Philippines, and internationally. The company offers its products to various industries, including automotive, computing and network, consumer, industrial and medical, and optoelectronics.

In August, COHU announced that another major integrated device manufacturer had chosen its Neon inspection and metrology platform for several of its worldwide manufacturing facilities. During the first eight months of 2021, COHU received orders for Neon totaling $33 million from various clients, primarily for inspection and metrology of advanced packages and bumped dies.

COHU's net sales increased 49.4% year-over-year to $225.06 million in the third quarter, ended September 25, 2021. Its operating income came in at $33.72 million, compared to a  $1.36 million operating loss in the prior-year period. The company reported $23.73 million in net income, compared to a 6.65 million net loss in the third quarter of 2020. Its EPS amounted to $0.48, compared to a $0.16 loss per share in the same period last year.

COHU's EPS is expected to grow 152.9% year-over-year to $3.01 in its fiscal year 2021. Analysts expect COHU's revenue to increase 39.1% year-over-year to $884.43 million in the current year. The stock has gained 6.4% in price over the past year.

COHU's POWR Ratings reflect this promising outlook. The company has an overall B rating, which translates to Buy in our proprietary rating system. The POWR Ratings assess stocks by 118 distinct factors, each with its own weighting.

COHU is rated an A grade for Value and Momentum and a B for Growth. Within the A-rated Semiconductor & Wireless Chip industry, it is ranked #47 of 100 stocks.

To see additional POWR Ratings for Stability, Quality, and Sentiment for COHU, click here.

Alpha and Omega Semiconductor Limited (AOSL)

Sunnyvale, Calif.-based AOSL designs, manufactures, and sells power semiconductors for computer, consumer electronics, communication, and industrial applications in Hong Kong, China, South Korea, the United States, and internationally. The company's portfolio of products targets high-volume applications, including portable computers, LED lights, cellphones, automotive electronics, servers, telecommunications equipment, and others. The company has a market capitalization of $1.36 billion.

Last month, AOSL unveiled its newest 80V Power MOSFET, which employs proprietary Shield Gate Technology and is tailored for higher switching frequencies used in telecom and server power supplies, resulting in better efficiency than the previous generation. The company's new 80V Power MOSFET technology features lower switching losses in hard switching topologies and less voltage overshoot than the previous generation.

For the first quarter, ended September 30, 2021, AOSL's net sales increased 23.4% from its year-ago value to $187.04 million. Its operating income grew 141.6% year-over-year to $24.95 million. The company's net income surged 144.7% from the prior-year quarter to $23.42 million, while its EPS increased 136.1% from the year-ago value to $0.85.

The company's EPS is expected to grow 40.6% year-over-year to $4.12 in the current year. In addition, its revenue is projected to increase 14.1% in the current year and 4.7% next year. AOSL's stock has gained 107.2% in price over the past year and 117.9% year-to-date.

AOSL's strong fundamentals are reflected in its POWR Ratings. The stock has an overall B rating, which equates to Buy in our POWR Ratings system. AOSL also has an A grade for Value and Momentum and a B for Growth. The stock is ranked #22 in the Semiconductor & Wireless Chip industry.

Beyond the POWR Ratings grades I have just highlighted, one can see the AOSL ratings for Sentiment, Stability, and Quality.

Click here to checkout our Semiconductor Industry Report for 2021

COHU shares were trading at $32.46 per share on Friday morning, down $0.00 (0.00%). Year-to-date, COHU has declined -14.98%, versus a 23.10% rise in the benchmark S&P 500 index during the same period.

About the Author: Pragya Pandey

Pragya is an equity research analyst and financial journalist with a passion for investing. In college she majored in finance and is currently pursuing the CFA program and is a Level II candidate.


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