Semiconductors are the picks and shovels of modern technology. Still, they’re subject to swings in the broader economy because customers often stockpile chips ahead of demand, and investors seem to believe that inventory levels are correcting - over the past six months, the industry has shed 7.5%. This drawdown is a stark contrast from the S&P 500’s 9% gain.

The elite companies can churn out earnings growth under any circumstance, however, and our mission at StockStory is to help you find them. With that said, here is one semiconductor stock poised to generate sustainable market-beating returns and two we’re steering clear of.

Two Semiconductors Stocks to Sell:

Texas Instruments (TXN)

Market Cap: $164 billion

Headquartered in Dallas, Texas since the 1950s, Texas Instruments (NASDAQ:TXN) is the world’s largest producer of analog semiconductors.

Why Does TXN Worry Us?

1. Annual sales declines of 11.6% for the past two years show its products and services struggled to connect with the market during this cycle
2. Efficiency has decreased over the last five years as its operating margin fell by 5.8 percentage points
3. Free cash flow margin shrank by 28.4 percentage points over the last five years, suggesting the company is consuming more capital to stay competitive

At $183.24 per share, Texas Instruments trades at 30.5x forward price-to-earnings. If you’re considering TXN for your portfolio, see our FREE research report to learn more.

Power Integrations (POWI)

Market Cap: $3.36 billion

A leading supplier of parts for electronics such as home appliances, Power Integrations (NASDAQ:POWI) is a semiconductor designer and developer specializing in products used for high-voltage power conversion.

Why Do We Pass on POWI?

1. Flat sales over the last five years suggest it must find different ways to grow during this cycle
2. Day-to-day expenses have swelled relative to revenue over the last five years as its operating margin fell by 10.2 percentage points
3. Falling earnings per share over the last five years has some investors worried as stock prices ultimately follow EPS over the long term

Power Integrations is trading at $59.99 per share, or 39.4x forward price-to-earnings. Check out our free in-depth research report to learn more about why POWI doesn’t pass our bar.

One Semiconductors Stock to Buy:

Monolithic Power Systems (MPWR)

Market Cap: $33.45 billion

Founded in 1997 by its longtime CEO Michael Hsing, Monolithic Power Systems (NASDAQ:MPWR) is an analog and mixed signal chipmaker that specializes in power management chips meant to minimize total energy consumption.

Why Will MPWR Beat the Market?

1. Market share has increased this cycle as its 10.9% annual revenue growth over the last two years was exceptional
2. MPWR is a free cash flow machine with the flexibility to invest in growth initiatives or return capital to shareholders, and its recently improved profitability means it has even more resources to invest or distribute
3. Industry-leading 46.6% return on capital demonstrates management’s skill in finding high-return investments

Monolithic Power Systems’s stock price of $691 implies a valuation ratio of 41.1x forward price-to-earnings. Is now the time to initiate a position? See for yourself in our in-depth research report, it’s free.

Stocks We Like Even More

With rates dropping, inflation stabilizing, and the elections in the rearview mirror, all signs point to the start of a new bull run - and we’re laser-focused on finding the best stocks for this upcoming cycle.

Put yourself in the driver’s seat by checking out our Top 5 Growth Stocks for this month. This is a curated list of our High Quality stocks that have generated a market-beating return of 175% over the last five years.

Stocks that made our list in 2019 include now familiar names such as Nvidia (+2,183% between December 2019 and December 2024) as well as under-the-radar businesses like Axon (+711% five-year return). Find your next big winner with StockStory today for free.