Semiconductors are the silicon backbone of the digital revolution. Compute-intensive AI workloads are also priming them for the next wave of secular growth, so it’s no wonder the industry has outperformed the market over the past six months, delivering returns of 77.8% compared to 25.5% for the S&P 500.

Although these businesses have produced results lately, investors should tread carefully as not all companies are equipped for the next technological innovation. Taking that into account, here is one semiconductor stock boasting a durable advantage and two that may face trouble.

Two Semiconductor Stocks to Sell:

Semtech (SMTC)

Market Cap: $6.14 billion

A public company since the late 1960s, Semtech (NASDAQ: SMTC) is a provider of analog and mixed-signal semiconductors used for Internet of Things systems and cloud connectivity.

Why Do We Avoid SMTC?

1. Growth came at the expense of profits over the last five years as its operating margin losses have increased
2. Weak free cash flow margin of 6.5% has deteriorated further over the last five years as its investments increased
3. Negative returns on capital show management lost money while trying to expand the business, and its falling returns suggest its earlier profit pools are drying up

At $68.84 per share, Semtech trades at 39.4x forward P/E. Read our free research report to see why you should think twice about including SMTC in your portfolio.

Allegro MicroSystems (ALGM)

Market Cap: $5.43 billion

The result of a spinoff from Sanken in Japan, Allegro MicroSystems (NASDAQ: ALGM) is a designer of power management chips and distance sensors used in electric vehicles and data centers.

Why Are We Hesitant About ALGM?

1. Products and services are facing significant end-market challenges during this cycle as sales have declined by 14.2% annually over the last two years
2. Performance over the past five years shows its incremental sales were much less profitable, as its earnings per share fell by 17.2% annually
3. Low free cash flow margin of 7.6% declined over the last five years as its investments ramped, giving it little breathing room

Allegro MicroSystems is trading at $29.01 per share, or 45.7x forward P/E. To fully understand why you should be careful with ALGM, check out our full research report (it’s free for active Edge members).

One Semiconductor Stock to Buy:

Monolithic Power Systems (MPWR)

Market Cap: $49.18 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. Impressive 29.9% annual revenue growth over the last five years indicates it’s winning market share this cycle
2. Robust free cash flow margin of 30.1% gives it many options for capital deployment, and its growing cash flow gives it even more resources to deploy
3. Industry-leading 45.9% return on capital demonstrates management’s skill in finding high-return investments

Monolithic Power Systems’s stock price of $1,021 implies a valuation ratio of 55.2x forward P/E. Is now the right time to buy? Find out in our full research report, it’s free for active Edge members.

Stocks We Like Even More

Donald Trump’s April 2025 "Liberation Day" tariffs sent markets into a tailspin, but stocks have since rebounded strongly, proving that knee-jerk reactions often create the best buying opportunities.

The smart money is already positioning for the next leg up. Don’t miss out on the recovery - check 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 183% over the last five years (as of March 31st 2025).

Stocks that made our list in 2020 include now familiar names such as Nvidia (+1,545% between March 2020 and March 2025) as well as under-the-radar businesses like the once-micro-cap company Tecnoglass (+1,754% five-year return). Find your next big winner with StockStory today for free. Find your next big winner with StockStory today. Find your next big winner with StockStory today

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