We recently compiled a list of the 10 Best Semiconductor Penny Stocks To Invest In Right Now. In this article, we are going to take a look at where AXT, Inc. (NASDAQ:AXTI) stands against the other semiconductor penny stocks.
With the age of artificial intelligence having made an indelible mark on the stock market, semiconductor stocks have been thrust into the spotlight. While it’s typically the stocks at the top of the semiconductor food chain, such as the AI GPU designer whose shares are up 740% since ChatGPT was made public or the Taiwanese contract chip manufacturer responsible for making AI GPUs or processors for Apple, that catch the media and public attention, the semiconductor industry is made of a plethora of other firms as well.
Broadly speaking, the semiconductor industry comprises firms upstream and downstream of the chip supply chain. Starting from the former category, these semiconductor stocks start from those that provide design intellectual properties and hardware used to manufacture chips. Moving further downstream, semiconductor fabrication firms such as the Taiwanese firm whose American Depository Receipts (ADRs) have gained 133% since ChatGPT’s public unveiling started to play a role. Finally, the downstream chip supply chain is made of designers who sell the products and others who assemble chips into the hardware needed for their proper functioning.
To invest in semiconductor stocks, an investor needs to know which supply chain category a stock belongs to. This is because industry dynamics often have a varying effect on stocks at different rungs of the supply chain. Additionally, when we talk about downstream stocks, then the markets that they cater to also play a role in the share price performance.
Stocks that are upstream are affected by broader industry trends and find it difficult to benefit from sector-specific tailwinds such as artificial intelligence. As an illustration, consider the performance of three upstream semiconductor stocks. The first stock ranks 7th on the list of 15 AI stocks shaping Wall Street, the second is 19th on Goldman Sachs’ list of top growth investors, while the third ranked 12th and was losing popularity among institutional investors according to Bank of America. The first two stocks are up 16% and 4% over the past twelve months while the third is up by a more modest 1%. Compared to the Philadelphia semiconductor stock index, a widely followed industry benchmark that has gained 32.2% over the same period, all three semiconductor stocks have underperformed.
A brief look at the three stocks’ business model sheds light on the reasons behind their lackluster performance. Starting from the worst stock whose shares are up by 1%. The firm provides semiconductor manufacturing equipment such as those used in wafer cleaning, etching, and film deposition. This means that it has exposure to the broader and non-AI sectors of the downstream semiconductor industry as well. Additionally, during its fiscal year 2024, 42% of the firm’s revenue came from the memory industry. These chips run parallel with integrated circuits in computers, and their demand has been depressed recently and only started to recover in mid-2024. It also has exposure to China, and semiconductor tensions between the US and China haven’t boded well for the stock either.
Similarly, the semiconductor stock that is up 16% over the past year also has notable exposure to China. During the nine months ending in July 2024, 40% of its revenue came from China. Yet, for the three months ending in July, this percentage dropped to 32% as US government restrictions against American chip firms from supplying products to China continued to affect it. This semiconductor firm provides products such as plasma abatement systems, epitaxy systems, film deposition systems, and etching masks. As a result, even if there are no US-Chinese tensions, the fact that China’s economy and industrial production have slowed naturally reduces the demand for its products.
On the downstream end of the semiconductor supply chain, there is a clear bifurcation between AI and non-AI stocks, or those with exposure to integrated circuits and GPUs, and those with no exposure. To understand how to consider two stocks of firms that manufacture semiconductors. The first is the Taiwanese firm which we’ve mentioned above. Its ADRs are up 87.2% year-to-date. The second ranks 16th on our BofA list shared above, and its shares are down 14.5% year-to-date. Starting from the former, during the third quarter, 51% of the firm’s revenue came from high-performance computing (HPC) products. These chips are involved in data centers, enterprise computing, and other workloads, and they also have wide exposure to the artificial intelligence industry. This firm also manufactures AI GPUs for Wall Street’s favorite GPU designer, and the culmination of its end markets coupled with the fact that its 3-nanometer manufacturing process is an industry leader has seen investor optimism surge surrounding its fortunes.
On the flip side, the semiconductor stock whose shares are down 14.5% has little exposure to HPC and AI chips. As of H1 2024, 53% of the firm’s $3.7 billion revenue came through products that it sold to the automotive industry. This firm is known for selling chips manufactured through silicon carbide. These chips are used to manage power in electric vehicles, and as EV demand has slowed down in 2024, investors have fled the stock in response. The semiconductor stock hasn’t been helped by the fact that slowing industrial activity led to a 21% industrial revenue drop during H1.
As should be clear by now, semiconductor stocks come in all flavors. One such flavor, when analyzing them through share prices, is the penny stock segment. These stocks belong to smaller companies that do not have sizable revenue to power their valuation. Yet, penny stocks, when prudently considered, also often have the chance for stronger returns due to their low prices. On the flip side, these stocks are prone to market manipulation, and since they’re not as frequently covered by analysts or the media, understanding the fundamental drivers of their share price is complex. With these details in mind, let’s take a look at some semiconductor penny stocks.
Our Methodology
To make our list of the best semiconductor penny stocks, we ranked semiconductor and semiconductor equipment stocks under $5 by the number of hedge funds that had bought the shares in Q3 2024 and picked out the top stocks.
Why are we interested in stocks that hedge funds pile into? The reason is simple: our research has shown that we can outperform the market by imitating the top stock picks of the best hedge funds. Our quarterly newsletter’s strategy selects 14 small-cap and large-cap stocks every quarter and has returned 275% since May 2014, beating its benchmark by 150 percentage points. (see more details here).
A close-up of a technician’s hands working on an advanced semiconductor substrate.
AXT, Inc. (NASDAQ:AXTI)
Number of Hedge Fund Holders In Q3 2024: 10
AXT, Inc. (NASDAQ:AXTI) is an upstream semiconductor firm that primarily makes and sells substrates. These products are used to manufacture chips on them, and AXT, Inc. (NASDAQ:AXTI)’s substrates revolve around communications, solar, robotics, and other associated applications. The stock has been on quite a ride this year. It fell by 37% in April after a research report alleged that the firm was facing tight financial conditions. AXT, Inc. (NASDAQ:AXTI)’s shares continued their downward momentum in November, as they fell by another 18% following a third-quarter revenue miss. While the firm raked in $23.6 million in revenue during Q3, analysts had expected it to bring in $25.5 million. Even though AXT, Inc. (NASDAQ:AXTI) is based in California, 99% of the firm’s long-term assets are in China. Additionally, 50.6% of the firm’s H1 2024 revenue came from the East Asian country, which creates a double-edged sword. While AXT, Inc. (NASDAQ:AXTI) can benefit from renewed Chinese focus on its domestic industry, the firm might also be caught in the crosshairs of geopolitical tensions between the US and China.
AXT, Inc. (NASDAQ:AXTI)’s management shared details about the state of its Chinese market during the Q3 2024 earnings call:
“Overall, the market recovery is somewhat lumpy, particularly given the weak economic conditions in China. But new fiscal stimulus in China announced in September could provide a catalyst for a truly market environment. This will benefit demand across a broad based of applications, including power amplifiers, HPT applications for wireless switches, high-speed power industrial labels, and LEDs. We continue to be encouraged by our relatively new traction in HPT applications by bringing the learning from our product that’s advancing in our 8-inch gallium arsenide development to our 6-inch gallium arsenide wafer production.”
Overall AXTI ranks 5th on our list of the semiconductor penny stocks to invest in now. While we acknowledge the potential of AXTI as an investment, our conviction lies in the belief that AI stocks hold greater promise for delivering higher returns and doing so within a shorter timeframe. If you are looking for an AI stock that is more promising than AXTI but that trades at less than 5 times its earnings, check out our report about the cheapest AI stock.
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Disclosure: None. This article is originally published at Insider Monkey.