We recently compiled a list of the 10 Best Semiconductor Penny Stocks To Buy. In this article, we are going to take a look at where Pixelworks, Inc. (NASDAQ:PXLW) stands against the other semiconductor penny stocks.

Semiconductors have propelled advancements in communications, computers, health care, military systems, transportation, clean energy, and a wide range of other uses. The United States is still at the forefront of cutting-edge manufacturing, design, and research because it invented semiconductor technology. The Semiconductor Industry Association reported $526.8 billion in sales in 2023. Over 70% of the sales made by American semiconductor companies go to foreign clients. In 2023, the US exported $52.7 billion worth of semiconductors, continuing to have a steady trade surplus in this commodity.

According to UN Comtrade DataBase, US imports of semiconductor devices were $26.83 billion, making it the world’s largest importer. On the other hand, China was the world’s top exporter of semiconductor devices in 2023, having shipped $61.32 billion worth of these goods.

The semiconductor industry is growing due to key trends like remote work, electric cars, and, AI, and McKinsey predicts that by 2030, the semiconductor market will reach $1 trillion, with the computing, wireless, and automotive sectors accounting for almost 70% of this growth.

Today, chipmakers are leaning towards 2 nm chips, however, developments from big tech companies indicate that by 2025-2027, it won’t go much beyond that. Hence, with the slowing of Moore’s Law, the semiconductor industry is shifting its focus to accelerated computing, especially in regards to AI. Moreover, there are promises on the software front as well, with AlphaTensor, developed by DeepMind, being touted as a finder for novel matrix-multiplication ways that could lead to the discovery of faster algorithms to speed up computing.

According to Fortune Business Insights, the global semiconductor market was valued at $611.35 billion in 2023 and is expected to grow at a CAGR of 14.9% from $681.05 billion in 2024 to $2062.59 billion by 2032. Regionally, Asia Pacific dominated the global industry, reaching $308.95 billion in 2023, exhibiting the highest growth in the market across the globe. The North American market is growing dynamically, mainly due to rising investments in research and development. The Semiconductor Industry Association (SIA) reveals that US semiconductor manufacturing companies have maintained a high level of R&D spending, allocating almost one-fifth of their total yearly revenue to this area. Innovations in chips were the main driver of this consolidation, which reached a record of $50.2 billion in 2021.

Supply chain challenges, due to the COVID-19 pandemic and geopolitical tensions, especially in China, revealed the United States’ reliance on foreign semiconductor suppliers, resulting in significant shortages. As a result, the US boosted its investment in domestic manufacturing and approved the $52 billion CHIPS and Science Act of 2022 in an effort to raise its share of global semiconductor production, which had fallen from 37% in 1990 to 12%. In order to improve regional capacities, businesses are constructing factories in the US. Through 2030, the value of US-based semiconductor projects that are underway, announced, or being considered ranges from $223 billion to more than $260 billion per Mckinsey.

On June 5th, the SIA revealed that global semiconductor industry sales totaled $49.1 billion in May 2024, up 19.3% from $41.2 billion in May 2023 and 4.1% from $47.2 billion in April 2024. The World Semiconductor Trade Statistics (WSTS) organization compiles monthly sales data, which represents a three-month moving average. Concerning revenue, SIA accounts for approximately two-thirds of non-US chip companies and 99% of the US semiconductor sector.

“The global semiconductor market has grown on a year-to-year basis during each month of 2024, and year-to-year sales in May increased by the largest percentage since April 2022,” said John Neuffer, SIA president and CEO. “The Americas market experienced particularly strong growth, with a year-to-year sales increase of 43.6%.

Sales YoY rose in the Asia Pacific/All Other region (13.8%), China (24.2%), and the Americas (43.6%), but plummeted in Japan (-5.8%) and Europe (-9.6%). The Americas (6.5%), China (5.0%), Asia Pacific/All Other (3.0%), and Japan (1.6%) had a rise in month-over-month sales in May, while Europe saw a decline (-1.0%).

Even if these numbers point to an improvement in the semiconductor supply chain, the chip scarcity that was caused by the COVID-19 pandemic in early 2020 may not have been fully resolved. According to automotive data experts at S&P Global, the chip shortage’s impact on new vehicle manufacturing will have subsided by the middle of 2023. Even though there were still supply constraints for chips, this is now the new normal, allowing automakers to forecast their availability and adjust production schedules appropriately.

Methodology:

In this article, we first used a stock screener, Finviz, to list down all semiconductor stocks trading under $5.00 (as of the writing of this article) with over 30% institutional ownership. From the resultant dataset, we chose 10 stocks with the highest number of hedge fund investors, using Insider Monkey’s database of 920 hedge funds in Q1 2024 to gauge hedge fund sentiment for stocks. We have used the stock’s Revenue Growth Rate (year-over-year) as a tie-breaker in case two or more stocks have the same number of hedge funds invested.

Why are we interested in the stocks that hedge funds pile into? The reason is simple: our research has shown that we can outperform the market by imitating the top stock picks of the best hedge funds. Our quarterly newsletter’s strategy selects 14 small-cap and large-cap stocks every quarter and has returned 275% since May 2014, beating its benchmark by 150 percentage points. (see more details here)

A close up of a circuit board, its microchips creating a powerful computing system.

Pixelworks, Inc. (NASDAQ:PXLW)

Number of Hedge Fund Investors: 15                                                          

Pixelworks, Inc. (NASDAQ:PXLW) is a semiconductor company that specializes in the design and sale of semiconductors used in display devices. The company’s products include processors for smartphones, image processors, digital signal processors for display systems, and other products that control image display on screens. The leading supplier of visual processing solutions recently partnered with Seasun Games to enhance JX3 Ultimate Mobile’s mobile visual processing.

Pixelworks issued a negative outlook while reporting Q1/2024 results that were in line with projections. Financial results for the upcoming quarters are anticipated to be impacted by a stop in orders placed by its largest mobile client and delays in the delivery of its new mobile visual processor. Furthermore, the Chinese subsidiary faces imminent deadlines for listing on the Shanghai STAR Market, which carries the risk of having to reimburse Chinese pre-IPO investors up to $44 million if the listing fails. Investors may think about selling existing stakes in light of these challenging business conditions and the impending IPO deadlines.

Notwithstanding temporary difficulties, Pixelworks has demonstrated a noteworthy YoY annual revenue growth in TTM by 3.59% and an improvement in gross margin by 3.97%, rising from 43.08% in 2023 to 44.79% in TTM. The company has a strong financial base due to its $46.2 million cash balance and just $2.78 million in debt. Pixelworks has the ability to surpass analyst estimates in terms of revenue growth in the second half of the year if it is able to overcome technical obstacles and earn fresh design wins. Furthermore, the financial risks connected to the Chinese company may be reduced by fruitful discussions or delays for the Shanghai STAR Market listing. Important victories, such as the Infinix GT 20 Pro from Transsion and the iQOO Z9 Turbo smartphone from Vivo, highlight the company’s increasing market reach and use of its technologies in mid-to lower-tier devices. Transsion’s mobile unit TAM growth into new markets is still planned, and an increase in TrueCut forecasts is anticipated. Moreover, the firm is transforming into a mobile silicon provider, fueled by high-performance mobile gaming demand.

As per analysts, the company has an average price target of $2.50 and an upside potential of 140.38% from the current stock price of $1.04. Analysts have rated PXLW as a “strong buy.”

Meanwhile, elite funds are piling into this stock as well, with hedge fund positions increasing from 5 in Q4 2023 to 15 in Q1 2024, giving us a clear hint that investors are bullish on PXLW’s stock. Israel Englander’s Millennium Management  is the largest stakeholder in the company, with 703,440 shares worth $1.81 million.

Overall PXLW ranks 3rd on our list of the best semiconductor penny stocks to buy. You can visit 10 Best Semiconductor Penny Stocks To Buy to see the other semiconductor penny stocks that are on hedge funds’ radar. While we acknowledge the potential of PXLW as an investment, our conviction lies in the belief that some AI stocks hold greater promise for delivering higher returns, and doing so within a shorter time frame. If you are looking for an AI stock that is more promising than PXLW but that trades at less than 5 times its earnings, check out our report about the cheapest AI stock.

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Disclosure: None. This article is originally published at Insider Monkey.