1 Red-Hot Semiconductor Stock That Just Crushed Earnings

Semiconductor shortages have dominated headlines in the business world this year. Manufacturers of consumer goods across the globe are struggling to meet their production targets because they can't get their hands on enough computer chips.

New cars are one enormous source of demand for semiconductors, especially with the growth of electric vehicles, and dealer lots are currently running on a fraction of the inventory they need to meet demand.

The issue has pushed consumers into the used car market, sending prices soaring 24.4% on average over the last 12 months. But semiconductor-service powerhouse Cohu (NASDAQ:COHU) is helping to alleviate these supply pressures, and it just delivered another big quarterly result. Here's how.

Automotive chips continue driving Cohu forward

Cohu provides testing and handling equipment to the world's largest semiconductor producers, assisting in the manufacture of computer chips for a range of applications including consumer electronics, mobility, and even the automotive market.

That segment has grown to become the company's largest, accounting for 20% of total revenue in the third quarter just announced, up from 18% in the second quarter. It highlights persistent demand from semiconductor producers that need to expand manufacturing capacity in preparation for a future consisting of smarter, more feature-heavy vehicles.

But it also displays Cohu's clever strategic focus, pivoting its attention to where it's needed most right now, which is helping producers clear order backlogs and relieve shortages.

Its Neon inspection and high-speed handling systems are designed to rapidly inspect computer chips as small as 0.2 millimeters by 0.4 millimeters, which are often used in automotive applications. These fragile components require delicate yet fast handling, so defects can be detected in efficient time frames so as not to hold up the production process.

Cohu's portfolio of automotive-related semiconductor equipment also extends to real-world-style environmental testing to ensure chips can withstand the stresses of everyday use. It also offers the capability to test and handle chips for new technologies like autonomous driving and broad electrification, which should play a significant role in the future of the automotive industry.

Strong third-quarter results

Cohu delivered 49% year-over-year revenue growth and 159% year-over-year earnings per share growth in the third quarter. Its $0.70 in third-quarter EPS adds to what is expected to be the company's first profitable year since 2017, after spending several years investing in the business.

Overall, as the end of the year approaches, 2021 financial results are set to crush what Cohu delivered in 2020.

Data source: Cohu, Yahoo! Finance.

The company's 41% estimated revenue growth would more than quadruple the 9% it generated in 2020 (when compared to 2019).

Cohu is so comfortable with its financial position right now that it just announced a $70 million share buyback program to return money to shareholders. It's not something investors would typically see from a relatively small $1.5 billion growth company, but it's an added benefit to the 47% rise in share price over the last 12 months.

Why you should buy the stock

When it comes to semiconductor stocks, many of them have experienced red-hot share price growth lately as investors price in higher profits from rising demand and low supply. Regardless, Cohu remains incredibly cheap compared to its peers.

The iShares Semiconductor ETF trades at a price-to-earnings multiple of 33, compared to a multiple of less than 11 for Cohu based on $3.05 in 2021 EPS. That means the stock would need to triple to align with the broader industry on a valuation basis.

Analysts expect Cohu to be just as profitable in 2022, so investors shouldn't be concerned that 2021 was a one-off result following a few years of losses. It aligns with the broader sentiment among car manufacturers, which suggests semiconductor shortages will persist well into the new year. That will only mean one thing: Demand for Cohu's testing and handling equipment is likely to remain elevated.

Cohu's strong third quarter is just another piece in its overwhelmingly positive story. Wall Street is certainly on board, with one firm predicting the stock will more than double from here.