7 Revealing Insights from a Mid-Cap Semiconductor Financial Health Check.

Uncovering the Hidden Gems: Mid-Cap Semiconductor Companies for Growth and Innovation.

In our previous post, we focused on Large-cap semiconductor companies, such as Intel corporation, ARM Technologies and Texas Instruments. often together with NVIDIA and TSMC these stocks seems to dominate the medias attention, but today we shall shine light upon a few interesting companies based in Mid-Cap chipmakers and see what type of opportunities we might have been sleeping on.

The TL;DR (Too Long; Didn’t Read)

What is a Mid-Cap Company?

Before we dive in, let’s define a mid-cap company. These are established businesses, often having a solid track record, but still in a growth phase. Compared to large-cap giants, they offer:

• Higher Growth Potential: Mid-cap companies have more room to expand, potentially offering bigger returns.
• Balanced Risk: While riskier than large-cap, they are generally considered less volatile than small-cap companies.
• Market Value: Typically, a mid-cap company’s market capitalization (total value of outstanding shares) falls between $2 billion and $10 billion.

About the tables below;

Before we dive into the analysis, I would like to apologize in advance to readers on smaller screens. The upcoming table may not be as responsive as I would have liked it to be. This is because the pro package for the tables on this blog platform costs around $79 per year and i use the free version. Since this blog is currently a hobby for me and I don’t generate any income from it, I have chosen not to invest in the pro package at this time. However, if this project performs well and gains traction, I do plan to upgrade to the pro package to provide a better user experience for all readers.

Before we start we need to go into the blogs point system and understand what it means, so you can later check the table and understand the tables content and what it means.

Also i would like to do a short recap of the risk assessment point system which i shared in greater detail in this post: https://bullishbeat.com/assessing-large-cap-semiconductor-stocks-financial-insights

i short note is that we discussed various financial metrics which is used to evaluate a company’s performance, divided into five main categories: profitability, liquidity, growth, valuation, and financial health.

Financial Health Check:

Outstanding Performers

• Rambus Inc. (RMBS) stands out with excellent ratings in profitability, liquidity, and EPS growth. Despite poor revenue growth and debt-to-equity ratio, RMBS has a strong Altman Z-score and Piotroski F-score, indicating overall financial health. Its PE ratio is also lower than the industry average, suggesting potential undervaluation.
• Tower Semiconductor Ltd. (TSEM) also performs exceptionally well, with excellent profitability, liquidity, and growth metrics. Although it has a poor debt-to-equity ratio, TSEM’s valuation ratios are significantly lower than the industry average, which may indicate an attractive investment opportunity.

Potential Risks:

• Several companies, such as Qorvo, Inc. (QRVO), MACOM Technology Solutions Holdings, Inc. (MTSI), Silicon Laboratories Inc. (SLAB), Synaptics Incorporated (SYNA), and Wolfspeed, Inc. (WOLF), have poor profitability and ROE/ROA metrics. This could be a cause for concern and may indicate underlying challenges in their business models or market conditions
• Synaptics Incorporated (SYNA) and Wolfspeed, Inc. (WOLF) exhibit weak financial performance, with poor profitability, growth, and financial health metrics. SYNA’s extremely high EV/EBITDA ratio further suggests that it may be overvalued relative to its peers, making it a potentially risky investment.

Mixed results

• Silicon Laboratories Inc. (SLAB) presents a mixed picture, with poor profitability metrics but excellent liquidity and a strong Altman Z-score. The lack of data for some growth and valuation metrics makes it challenging to form a complete assessment of the company’s prospects.
• Allegro MicroSystems, Inc. (ALGM) and FormFactor, Inc. (FORM) have good profitability and growth metrics, along with strong Altman Z-scores and Piotroski F-scores. Despite these positive factors, their valuation ratios are higher than the industry average, indicating potential risks that investors should consider before making a decision.

Rambus Inc:

So without further adue i started investigating the company closer by reviewing its latest 10-Q Sec filing to uncover more infomration and this is what i found interesting:

Positive Signs:

• Soaring Royalty Revenue: Revenue from royalty agreements jumped a staggering 68.5% year-over-year in Q1 2024, showcasing the effectiveness of their intellectual property monetization strategy.
• Explosive EPS Growth: Diluted EPS skyrocketed 900%, reflecting the high-margin nature of the licensing business.
• Shifting Focus: Rambus appears to be strategically transitioning towards a more royalty-driven business model, potentially indicating long-term profitability gains.

Areas for Caution:

• Declining Product & Contract Revenue: Overall revenue growth remains modest at just 3.6%. This is primarily due to a concerning decline in product and contract revenue segments.
• Sustainability Concerns: The substantial increase in EPS and royalty revenue is impressive, but its long-term sustainability and predictability remain unclear. Investors should monitor future trends closely.
• Concentrated Customer Base: The top five customers contribute a significant 64% of Rambus’ revenue, exposing the company to potential risks.

Blogs analysis:

Rambus is at an important point in its journey. The licensing business is doing well and making a lot of money, but the main business parts are not growing as much. This raises questions about whether the company can keep growing in the future.

For Rambus to do well in the long run, it needs to find a balance. It’s important to keep making the licensing business stronger, but it’s just as important to make the product and contract businesses grow again. This might mean spending money wisely on research and development, focusing on the right kind of marketing, and finding new customers so that the company doesn’t depend too much on just a few big clients.

Tower Semiconductor (TSEM):

Strengths:

• Leader in specialty foundries with advanced analog tech
• Global reach and diverse customer base (but some concentration)
• Strong financials: healthy margins, profitability even in a down year
• Investing in growth: capacity expansion, partnership with Intel

Areas for Caution:

• Competitive and cyclical industry (requires continuous innovation)
• Geopolitical risks and intellectual property protection
• Customer concentration (NTCJ: 14% of revenue) and with four other customers with 3-9%

TSEM is doing well in its special area of making computer chips. Even though they made less money in 2023, they still have good profits and are spending money to grow. They have a small number of big customers, which could be a problem, but this is normal for their industry. To keep doing well, they need to make their factories bigger, keep making better products, and find new customers (maybe by buying other companies).

Comparison to others: It’s common for companies like TSEM to have a small number of big customers. For example, Rambus gets most of its money from just 5 customers. This can be risky, but it also shows that these companies have strong relationships with their customers in this industry.

A comment to the findings:

Rambus, for example, gets a whopping 64% of its money from just five customers! Similarly, TSEM’s biggest customer accounts for 14% of its sales, and four other customers make up another 3-9% each.

While having a small group of important customers can be risky (imagine if one of them decided to take their business elsewhere), it also shows that these chip companies have built strong, long-lasting relationships with their clients. In an industry where making chips is complicated and requires a lot of teamwork between the chip maker and the customer, having a few loyal customers can be a good thing.

However, relying too much on a handful of customers can still be dangerous. If something goes wrong with one of these big customers, it could really hurt the chip company’s sales and profits. That’s why companies like Rambus and TSEM are always trying to find new customers and grow their businesses in different ways.

And as per usual this is the blogs own subjective analysis upon the presented data.

Readers should keep in mind that this analysis is based on historical financial data and should not be considered as investment advice. It is essential for readers to conduct their own thorough research and consult with financial professionals before making any investment decisions. The information provided in this article is for educational and informational purposes only and should not be relied upon as a sole basis for investment choices.

What type of analysis should i do next? Continue in semiconductor industry or venture elsewhere? any other kind of quantative analysis you are interest in? Comment down below.