After a nice rally off the October lows, we’re seeing selling pressure on tech stocks pick up. Specifically, chip and semiconductor stocks are taking a big hit again. As a result, many investors are looking for potentially undervalued semiconductor stocks.
Semi stocks are interesting. On the one hand, many of them sell commoditized products and are cyclical. In other words, they have poor margins while their fate is largely determined by the direction of the economy.
On the other hand, other chip makers have excellent margins, particularly in strong semiconductor markets. And some companies in the sector may have fairly non-cyclical businesses, given how critical its components are to today’s technologies.
With that in mind, let’s try to find non-cyclical chip companies with high margins whose stocks have tumbled along with those of the less attractive names.
Undervalued Semiconductor Stocks
Taiwan Semiconductor (TSM)
Just because a company is more non-cyclical doesn’t mean it’s immune to the swoons of the economy. Just look at Taiwan Semiconductor (NYSE:TSM), which has suffered a peak-to-trough decline of 59%. After rallying strongly, the shares are again struggling to regain their momentum.
Taiwan Semi will end up generating strong growth in its fiscal 2022, but its earnings are expected to decline in 2023. Analysts, on average, expect its bottom line to fall 7.5% next year, and the mean estimate calls for a modest 3% increase in its revenue.
While its growth is expected to decelerate next year, its top and bottom lines are still expected to be much higher than in 2021. Analysts’ average estimates call for earnings of $5.96 a share in 2023 on revenue of roughly $77 billion. That’s still up 44% and 35.5% versus its 2021 performance, respectively.
That’s not the traditional way to value a stock. But it provides perspective on a stock that trades at 11.5 times this year’s earnings and 12.3 times the average EPS estimate for 2023.
Plus, Taiwan Semi has very good operating margins for the sector, as its operating margins are usually around 47%. For what it’s worth, that’s better than the numbers reported by the FAANG stocks and Microsoft (NASDAQ:MSFT).
Advanced Micro Devices (AMD)
Advanced Micro Devices (NASDAQ:AMD) did not rise as much above its October low as I thought it would, given the extent of the rallies of its peers.
Regardless, the stock is starting to look like a potential bargain as it hovers in the low $60s. If the shares of AMD retest their recent low near $54.50, they will be hard for long-term investors to ignore At that point, the shares would be trading for less than 16 times the company’s earnings.
CEO Lisa Su has worked hard to drastically improve the company’s balance sheet, profitability and free cash flow. Analysts’ long-term estimates for AMD have indeed declined over the last several quarters. That was to be expected given the economic climate. But did you know that most analysts still expect the company to generate positive earnings and revenue growth in 2023?
They expect the company to generate mild growth, but they’re calling for growth nonetheless. And if the shares do retest their low, the stock will have fallen at least 67% from its high. At some point, enough is enough.
Broadcom (AVGO)
One name that seems to fly under the radar is Broadcom (NASDAQ:AVGO). Despite sporting a $228 billion market cap, AVGO seems to get little attention, compared with some of the more popular names in this space.
Of those on this list, Broadcom has certainly held up the best, as its peak-to-trough decline was “just” 38%. Further, Broadcom has a 3.3% dividend yield. That helps give investors a little bit of a cushion while they wait out this bear market.
The stock is still up 33% from its recent low as investors realized how well the company has been doing despite the macroeconomic challenges. AVGO stock rebounded after Broadcom delivered a top- and bottom-line beat, provided better-than-expected Q1 guidance and raised its dividend by 12%.
Analysts, on average, expect the company to deliver mid- to high-single-digit-percentage revenue and earnings growth in its fiscal 2023 (which is just beginning) and in FY24. For that growth, investors are paying just 13.5 times analysts’ mean earnings estimate for this year.
The shares previously bottomed around $415. If the bear market roars again, I’m sure Broadcom will be under pressure.
Will it retest its low? I don’t know, but if it does so — and analysts’ earnings estimates don’t change — the stock would be trading at roughly ten times AVGO’s earnings with a dividend yield of 4.5%.
Now that would be hard to ignore.
— Brett Kenwell
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Source: Investor Place