The semiconductor sector has had a rough go of it lately. In addition to the tech-led broader bear market, it was hit first by pandemic-induced supply chain woes and then by a cyclical downturn as demand for many products plummeted amid a slowing economy. This has led to a number of undervalued semiconductor stocks trading at ridiculously low valuations.
Yet, just because a security is undervalued does not mean it is guaranteed to rise in price. Many semiconductor stocks have been undervalued for years, which is interesting given how valuable these companies and their technologies are to life as we know it. Additionally, while it’s true many chip companies are both commoditized and cyclical, many of them are not.
For those looking for long-term opportunities in undervalued semiconductor stocks, I suggest focusing on companies that produce high-quality, high-margin and proprietary chips. Those stocks deserve to trade at a premium, and they are likely to do so once the market becomes a bit friendlier toward tech.
|AMD||Advanced Micro Devices||$77.63|
Advanced Micro Devices (AMD)
The caveat with Advanced Micro Devices (NASDAQ:AMD) — and really, all the names on this list of undervalued semiconductor stocks — is that it’s had a strong rally off the lows. While shares are down 46% over the past year, they have risen 42% from their 52-week low, made in mid-October.
As a maker of higher-end chips, Advanced Micro Devices’ business has fared better than some of its rivals. The company’s latest quarterly results, released in early November, included a top-line beat, with revenue up 29% year over year, and earnings that were roughly in line with estimates. But management warned that weakening PC sales will weigh on its fourth-quarter results.
Advanced Micro Devices lowered its full-year revenue guidance to $23.5 billion, which would represent growth of more than 43% for the year. Admittedly, growth is projected to slow in fiscal 2023 to around 6%. But given the current economic environment and the sharp slowdown in PC sales, that’s not so bad. And fiscal 2022’s growth will be juiced by the company’s acquisition of Xilinx. In fiscal 2024 and 2025, analysts expect revenue growth to accelerate once again to 15% and 22%, respectively.
AMD stock currently trades for 21.3 times fiscal 2023 earnings estimates. If shares were to retrace back down to their recent low below $55, they would trade for around 15 times earnings. At that point, they would be almost too good to pass up.
Nvidia (NASDAQ:NVDA) is arguably the top-tier semiconductor company. Its products are used in everything from artificial intelligence to data centers and cloud computing — with plenty of applications in between.
NVDA may not look like an undervalued stock, traditionally speaking. Shares sport a trailing price-earnings ratio of 72 and a forward P/E of 39. However, GuruFocus rates the stock as “significantly undervalued” based on its proprietary calculation. Further, the company’s three-year revenue growth rate of 31.3% ranks better than 89% of its peers.
While revenue is expected to be flat for the current fiscal year, analysts forecast growth of 9% in fiscal 2024 and 21% in fiscal 2025. Meanwhile, while earnings are expected to be lower for the current fiscal year, they are projected to increase by about 30% a year in the subsequent two years.
NVDA stock is down 42% over the past year, although shares have rallied nearly 57% from their 52-week low, made in mid-October. Buying shares on a pullback would be ideal, but it’s hard to say when or if that pullback may come. What I can say for sure is that I’m bullish on the long-term opportunity presented by this name.
Last but not least we have Broadcom (NASDAQ:AVGO), which develops and supplies a range of semiconductor and infrastructure software solutions. It’s held up better than many of its peers, with shares down only 17% over the past 12 months. Since bottoming out in mid-October, AVGO is up 33%.
Broadcom’s latest quarterly results, reported in early September, exceeded analysts’ estimates on the top and bottom lines. This was due in large part to a 78% year-over-year jump in semiconductor sales.
“We expect solid demand across our end markets to continue in the fourth quarter, reflecting continued investment by our customers of next-generation technologies in data centers, broadband, and wireless,” CEO Hock Tan said.
For the full year, analysts are predicting revenue growth of almost 21%, followed by 6% growth next year. Analysts forecast earnings will jump 34% to $37.44 per share this year and another 8% next year to $40.56 per share.
At its current price, AVGO is trading at less than 15 times this year’s average estimate and less than 14 times next year’s. If shares were to give up half of their recent gains from the October low — meaning a pullback to roughly $483 — shares would trade at just 12 times next year’s earnings estimate.
Finally, Broadcom pays a nice dividend, especially for a tech stock, with shares yielding 3.2%. This passive income stream only adds to AVGO’s attractiveness as one of the top undervalued semiconductor stocks.
On the date of publication, Bret Kenwell held a long position in NVDA. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.