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As the global economy gathers steam this year, fueled by mass COVID-19 vaccinations and a substantial increase in demand, a concern has been growing among industries that depend on semiconductors. That’s because the semiconductor industry faces a supply crunch, and with rising demand for devices and electric vehicles, a chip shortage could thoroughly hamstring the operations of swaths of end-product manufacturers.

Against this backdrop, leading semiconductor companies STMicroelectronics N.V. (STM - Get Rating) and O2Micro International Limited (OIIM - Get Rating) have been ramping up production to meet the ballooning demand. These companies have delivered promising top-line growth and are well-positioned to outperform the market in the days to come.

Conversely, Cree, Inc. (CREE - Get Rating) and SemiLEDs Corporation (LEDS - Get Rating) have reported negative earnings in their last reported quarter as they continue to confront challenges associated with the broader macro environment. We think their weak fundamentals and unimpressive financials could prevent them from capitalizing on the surge in demand.

Stocks to buy:

STMicroelectronics N.V. (STM - Get Rating)

Headquartered in Geneva, Switzerland, STM is a designer, manufacturer, and marketer of semiconductor products in Europe, the Middle East, Africa, the Americas, and the Asia Pacific. The company operates through the following segments:  Automotive and Discrete Group, Analog, MEMS and Sensors Group, and Microcontrollers and Digital ICs Group.

STM  recently developed the world’s smallest MEMS mirror with Intel to enable continuous laser scanning across the entire field of view. This second-generation micro-mirror should break ground in  3D scanning and detection applications and help the company meet the technical needs of its customers.

This month, the company is extending its long-term plan to boost automotive innovation to support customers of STM’s SPC56 automotive microcontrollers. This development would enable customers to extend the lifetime of their products because they could continue to depend on the performance of automotive microcontrollers.

In the fourth quarter, ended December 31, 2020, STM’s revenue has increased 21.3% sequentially to $3.24 billion. Its gross margin grew 280 basis points sequentially to 38.8%, while its gross profit increased 16% year-over-year to $1.25 billion. The company’s operating margin increased 800 basis points sequentially to 20.3%.

A consensus EPS estimate of $1.67 for 2021 represents a 39.2% improvement year-over-year. The consensus revenue estimate of $12.11 billion for the current year represents an 18.5% increase year-over-year. The stock has gained 52.7% over the past year.

STM’s POWR Ratings reflect this promising outlook. The company has an overall rating of A, which translates to a Strong Buy in our proprietary ratings system. The POWR Ratings are calculated by considering 118 different factors with the weighting of each optimized to improve overall performance.

STM has a B grade for Sentiment, Momentum, and Quality. Of the 99-stock B-rated Semiconductor & Wireless Chip industry, it is ranked #8.

To see additional POWR Ratings for Growth, Value, and Stability for STM, Click here.

O2Micro International Limited (OIIM - Get Rating)

Founded in 1995, OIIM designs and markets integrated circuits and solutions for power management components and systems in China, the United States, and internationally. The company’s products are used in the consumer electronics, computer, industrial, communication, and automotive markets.

Last month, the company was issued a patent grant for its invention of a key system and method for driving light sources. OIIM believes this invention will be a cost-effective solution to power management.

OIIM’ operating revenue has increased 30.1% year-over-year to $23.24 million in the fourth quarter ended December 31, 2020. Its gross profit increased 17.6% from its year-ago value to $11.92 million. The company’s net income rose 143.8% year-over-year to $4.36 million, and its EPS increased 128.6% year-over-year to $0.16.

The consensus EPS estimate of $0.39 for 2021 indicates an 85.7% improvement year-over-year. OIIM has an impressive earnings surprise history; the company beat consensus EPS estimates in three of the trailing four quarters. The consensus revenue estimate of $96.67 million for the current year represents a 23.4% increase year-over-year. The stock has gained 544.4% over the past year.

OIIM’s strong fundamentals are reflected in its POWR Ratings. The stock has an overall rating of A, which equates to Strong Buy in our proprietary ratings system. OIIM has an A  grade for Value, and a B grade for Growth and Sentiment. Of the 99 stocks in the same industry, it is ranked #7.

In total, we rate OIIM on eight different components. Beyond what we’ve stated above we have also given OIIM grades for Momentum, Stability, and Quality. Get all the OIIM ratings here.

Stocks to avoid:

Cree, Inc. (CREE - Get Rating)

Based in Durham, North Carolina, CREE offers semiconductor products, lighting-class light-emitting diodes (LED), and radiofrequency applications in the United States, Europe, and internationally. It operates through two segments—Wolfspeed and LED Products, and sells SiC power device products, LED modules, high-electron-mobility transistors, among other products.

This month, the company completed the sale of its LED Products business unit to SMART Global Holdings for approximately $300 million. CREE also plans to change its corporate name to Wolfspeed later this year as the company establishes itself as a pure-play semiconductor powerhouse.

CREE’s research and development expenses increased 17.6% year-over-year to $45.5 million for the fiscal second quarter, ended December 27, 2020. The company reported an operating loss of $57.6 million and a net loss of $83 million. Its loss per share was  $0.49 over this period.

A consensus EPS estimate for the next quarter, ending June 30, 2021, represents a 16.7% decline year-over-year. The consensus revenue estimate of $138.84 million for the current year represents a 32.5% decline from the same period last year. The stock has lost 4.3% year-to-date and is currently trading 20.9% below its 52-week high of $129.90, indicating short-term bearishness.

CREE’s POWR Ratings are consistent with this bleak outlook. It has an overall rating of F, which equates to a Strong Sell in our POWR Ratings system. CREE has an F grade for Value and Quality and D for Growth. Of the 99 stocks in the same industry, it is ranked #99.

Click here to see the additional POWR Ratings for CREE (Stability, Sentiment, and Momentum).

SemiLEDs Corporation (LEDS - Get Rating)

LEDS is a manufacturer and seller of light-emitting diode (LED) chips, LED components, and LED modules in the United States and internationally. LEDS’ net revenues decreased 48.6% sequentially to $719 thousand in the fiscal first quarter ended November 30, 2020. The company generated an operating loss of $972 thousand and a net loss of $697 thousand. In fact, its GAAP gross margin for the first quarter of fiscal 2021 was negative 3%, compared with a gross margin of 8% for the fourth quarter of fiscal 2020.

The stock has gained 155.2% over the past year but is currently trading 49.9% below its 52-week high of $9.38, indicating short-term bearishness.

LEDS’ weak prospects are apparent in its POWR Ratings as well. The stock has an overall rating of D, equating to a Sell in our proprietary rating system. LED also has a grade of D for Growth and Stability, and an F for Quality. In the same industry, the stock is ranked #87.

In addition to the POWR Ratings grades I’ve just highlighted, you can see the LEDs ratings for Value, Momentum, and Sentiment.

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STM shares were trading at $36.23 per share on Thursday afternoon, up $1.62 (+4.68%). Year-to-date, STM has declined -2.40%, versus a 5.74% rise in the benchmark S&P 500 index during the same period.