The Semiconductor industry is undergoing a massive consolidation wave. A huge number of mergers and acquisitions (M&A) worth hundreds of billion dollars have taken place over the last few years.

Consolidation is natural in a mature industry like semiconductor, which is now more than 60 years old. This industry is currently plagued with two huge challenges, which include escalating costs of producing chips for devices and a sluggish growth rate.

With continued innovation over the decades, the size of chips has shrunk to that of a few atoms, while the costs of producing these have flared up. Moreover, rising costs for designing, packaging and testing are becoming unaffordable for most companies, especially for the smaller firms.

Additionally, the industry has been countering a sluggish growth-rate challenge despite big trends like Internet of Things (IoT), which is believed to add an extraordinary volume in the sales of electronic devices. Over the last 15-20 years, the semiconductor industry has recorded growth at an annualized rate of less than 5%.

Industry Finds M&A as a Solution

In such a turbulent environment, semiconductor companies need to be huge in order to compete effectively. Therefore, these companies have resorted to M&A in an effort to grab more market share, cut costs, boost productivity and improve investment returns through scale economies.

Over the last year, the industry has witnessed more than 30 mergers and acquisitions.

During second-quarter 2020, the industry witnessed two major merger and acquisition deals which have a combined worth of more than $60 billion. In July, Analog Devices ADI agreed to acquire Maxim Integrated Products MXIM in an all-stock deal worth $20.9 billion. The transaction, which is expected to complete in summer 2021, will be accretive to Analog’s earnings and provide cost synergies.

Last month, NVIDIA NVDA entered into a definitive agreement to buy the U.K.-based Arm Holdings in a deal valued at $40 billion. The transaction is anticipated to be immediately accretive to the graphic chip maker’s gross margin and earnings.

Last week, The Wall Street Journal reported that Advanced Micro Devices AMD is interested in buying Xilinx XLNX, in a deal that could be worth $30 billion. The business-focused news agency reported that the companies are in advanced talks and a deal could be finalized as early as this week.

All the recent M&A events are hinting toward a new wave of consolidation in the semiconductor industry in the near future.

Grab this Emerging Opportunity

M&A announcements generally result in a massive surge of the targeted company’s share prices, thereby, providing investors the opportunity to make huge money overnight. As the consolidation cycle for the semiconductor industry does not seem to end any time soon, it is wise to stay focused on stocks that could be potential takeover targets.

We, at Zacks, have picked three semiconductor stocks which can be considered as the best takeover targets given their bright growth prospects and impressive valuations.

The first stock in our list is Qorvo, Inc. QRVO, which is a leading provider of core technologies and radio frequency (RF) solutions for mobile, infrastructure and aerospace/defense applications. The company has been benefiting from broad-based demand in 5G handsets, Wi-Fi 6 and IoT products. Synergies from Decawave, Active-Semi and MEMS technology acquisitions have significantly expanded Qorvo’s capabilities and position it well to gain from the surging demand for proximity awareness, secure payments and secure access for smartphones, automotive and IoT.

In the IoT-powered connectivity and broadband business, the company is increasing shipments of Wi-Fi 6 solutions and secured multiple cable amplifier design wins for catering to the rising need for data to homes owing to the COVID-19-induced shelter-in-place guidelines. Notably, Qorvo is expanding its global customer base for Wi-Fi 6 solutions, front-end modules (FEM) and BAW filters.

Further, although the stock has appreciated 18.2% in the year-to-date period, it is still undervalued given the fact that it currently trades at a forward P/E multiple of just 19.5x, significantly lower than its industry average of 27.6x. Moreover, the company has an expected long-term EPS growth rate of 12.3%. Qorvo currently carries a Zacks Rank #2 (Buy) and has VGM Score of B.

You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

Qorvo, Inc. Price and Consensus

Qorvo, Inc. Price and Consensus

Qorvo, Inc. price-consensus-chart | Qorvo, Inc. Quote

Another potential pick is Teradyne, Inc. TER, which provides automated test equipment to semiconductor companies. The company has been gaining from robust Semiconductor Test and System Test businesses. Further, it continues to benefit from the expanding memory market exposure and an impressive product line-up. Additionally, robust Test demand is a key positive.

Management is also optimistic about the Universal Robots acquisition and the continuous design wins. We believe the company has significant growth opportunities in the high-growth wireless test market for the long haul. Moreover, rising memory and storage test shipments, and new product design wins are major growth drivers.

Although the stock has appreciated approximately 27% in the year-to-date period, it is still trading at a huge discount to the industry average based on forward earnings estimates. The company trades at a forward P/E multiple of 22.2, which is a significant discount to the industry average of 29.4. Apart from this, the company has an expected long-term EPS growth rate of 16.7%, much higher than the industry average of 9.1%.

At present, Teradyne carries a Zacks Rank #3 (Hold) and has VGM Score of A.

Teradyne, Inc. Price and Consensus

Teradyne, Inc. Price and Consensus

Teradyne, Inc. price-consensus-chart | Teradyne, Inc. Quote

SMART Global Holdings Inc. SGH, which is a leading provider of DRAM memory to the Brazil market, is another semiconductor company which looks like a potential takeover target. Although the company was founded 25 years back, it got listed in May 2017. The company’s last three quarterly results have been stellar, thanks to the elevated demand as well as prices of DRAMs.

Shares of the company have declined nearly 33% in the year-to-date period. The stock is highly undervalued as it trades at a forward P/E multiple of 7.5x, which is a significant discount to the industry average of 20.2x. Moreover, the stock currently carries a Zacks Rank #3 and has VGM Score of A.

SMART Global Holdings, Inc. Price and Consensus SMART Global Holdings, Inc. Price and Consensus

SMART Global Holdings, Inc. price-consensus-chart | SMART Global Holdings, Inc. Quote

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NVIDIA Corporation (NVDA): Free Stock Analysis Report

Advanced Micro Devices, Inc. (AMD): Free Stock Analysis Report

Maxim Integrated Products, Inc. (MXIM): Free Stock Analysis Report

Analog Devices, Inc. (ADI): Free Stock Analysis Report

Xilinx, Inc. (XLNX): Free Stock Analysis Report

Teradyne, Inc. (TER): Free Stock Analysis Report

Qorvo, Inc. (QRVO): Free Stock Analysis Report

SMART Global Holdings, Inc. (SGH): Free Stock Analysis Report

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The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

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