5 undervalued semiconductor stocks
Semiconductor stocks took a beating in 2022, leaving many names trading at a discount.
Mentioned: Advanced Micro Devices Inc (AMD), Intel Corp (INTC), Marvell Technology Inc (MRVL), NVIDIA Corp (NVDA), NXP Semiconductors NV (NXPI), Samsung Electronics Co Ltd (SSNHZ), Skyworks Solutions Inc (SWKS), Taiwan Semiconductor Manufacturing Co Ltd (TSM), Texas Instruments Inc (TXN), Volkswagen AG (VLKAF)
Semiconductor stocks have gotten clobbered in the past year amid lingering supply chain constraints, geopolitical sales restrictions, and rising interest rates. But for long-term investors interested in adding semiconductor stocks to their portfolio, these headwinds have sent the stocks of several high-quality companies down to discount-level prices.
It’s been a tough road for semiconductor stocks over the past year.
As of Feb. 21, 2023, the Morningstar US Semiconductor Index, which measures the performance of companies operating in the semiconductors industry, is down 10.7% for the trailing 12-month period. That’s more than twice the decline of the broader market, which is off 5% for the same period, as measured by the Morningstar US Market Index.
The pandemic-fueled boom in demand for home electronics and personal computers—destinations for semiconductor chips—dwindled, leaving an oversupply of chips in its place. Then, fears of a recession led companies to reduce their spending on high-tech semiconductor products. On top of that, in late 2022, the U.S. Department of Commerce’s restrictions on the sale of semiconductors and equipment to China led to another slump for semiconductor stocks.
All this contributed to a loss of 37.7% for the U.S. Semiconductor Index in 2022, compared with a 19.4% drop in the US Market Index.
What is a Semiconductor Stock?
To look for undervalued stocks in the semiconductor industry, we screened the Morningstar US Semiconductor Index for names that carried a Morningstar Rating of 4 or 5 stars, which is determined by a stock’s current price, Morningstar’s estimate of the stock’s fair value, and the uncertainty rating of the fair value. We also screened for companies that carried a Morningstar Economic Moat Rating of narrow, which measures the degree to which the company has a durable competitive advantage.
Semiconductor Stocks to Buy Now
These were the five most undervalued semiconductor stocks in the Morningstar US Semiconductor Index as of Feb. 21, 2023.
The most undervalued company on the list is Advanced Micro Devices, trading at a 32% discount to the fair value estimate set by Morningstar analysts. The least undervalued on the list is NXP Semiconductors, trading at a 12% discount.
Advanced Micro Devices
- Ticker: AMD
- Fair Value Estimate: $115
- Stock Price: $78.50
“Advanced Micro Devices designs an array of chips for various computing applications. These products include central processing units and graphics processing units tailored to PCs, game consoles, and servers. AMD operates in the x86-based duopoly with Intel that dominates the PC and server CPU markets. We think AMD benefits from intangible assets related to its x86 instruction set architecture license and chip design expertise, which gives us confidence that the firm will generate excess returns over its cost of capital over the next decade and thus warrants a narrow economic moat rating.”
“We think the firm is well positioned to enjoy data center growth driven by the shift from on-premises to cloud computing. In the mature PC market, we think AMD will also gain share at Intel’s expense in the coming years. One potent risk for both AMD and Intel is the shift to ARM-based CPUs in PCs and servers, though we expect x86-based chips to remain dominant for the foreseeable future. AMD has focused on utilizing its CPU and GPU technology in semicustom processor applications, such as game consoles. AMD’s semicustom processors have been included in recent Microsoft Xbox and Sony PlayStation game consoles. AMD also competes against Nvidia in the discrete GPU market, though we don’t believe AMD is as competitive in GPUs as it is in CPUs.”
—Abhinav Davuluri, strategist
- Ticker: SWKS
- Fair Value Estimate: $155
- Stock Price: $115.84
“Skyworks Solutions is a leading supplier of a variety of radio frequency components to smartphone makers and other electronics manufacturers. Although the company faces an intense competitive landscape, it should succeed in the coming years as the handset industry focuses on 5G devices, which we expect to require higher radio frequency dollar content per phone.”
“Skyworks earns the majority of its revenue from mobile products, mostly from a variety of products that switch, filter, and amplify wireless signals in smartphones. Given the rise of advanced 5G-enabled smartphones, which use a wider variety of wireless spectrum and frequency bands than in prior generations of networks, RF content per phone has grown exponentially in recent years, lifting Skyworks and its RF competitors. 5G rollouts are in the early innings today and 5G-connected devices should be even more complex, making Skyworks’ expertise even more valuable to device makers. Meanwhile, Skyworks is one of the few RF firms with the scale to supply hundreds of millions of RF products per year, giving it a leg up on new entrants.”
—Brian Colello, senior director
- Ticker: MRVL
- Fair Value Estimate: $57
- Stock Price: $44.14
“We view Marvell Technology as a strong competitor in networking chips, resulting from a multiyear business pivot using acquisitions, divestitures, and organic development to focus on the cloud, 5G, and automotive markets. In our view, the new-look Marvell offers strong growth potential, impressive profitability, and a healthy competitive position. Between switching, network processing, and optical chips, Marvell has one of the broadest networking silicon portfolios in the world, and we believe it is primed to grow faster than its underlying markets as future networking setups utilize greater content and we anticipate Marvell will continue to win sockets over competitors.
“We expect Marvell to continue competing at the cutting edge of networking silicon with chip heavyweights like Broadcom AVGO, Nvidia, and Intel. Marvell’s billions in cumulative R&D investment, both organically and via acquisitions, has generated design prowess, and we see its strong customer relationships with cloud providers and networking equipment vendors alike as sticky. Marvell wins designs using its broad portfolio of intellectual property to create tailored or customized solutions, and earns impressive profits while doing so. In our view, Marvell merits a narrow economic moat rating.”
“We view the firm as prone to cyclicality in its end markets, arising from cloud capital expenditures, 5G buildouts, and the cyclical storage drive market. Though we believe Marvell’s moat and content growth opportunity help it to smooth over some cyclicality, it can be vulnerable to downturns in end customer spending.”
—William Kerwin, analyst
- Ticker: INTC
- Fair Value Estimate: $35
- Stock Price: $27.61
“Intel is the market share leader in the integrated design and manufacturing of microprocessors found in PCs and servers. Historically, the firm supplied the most powerful CPUs, though it has had numerous missteps in recent years. The data centers used to facilitate the information stored, analyzed, and accessed by various front-end devices are mostly run with Intel server chips.”
“Intel primarily designs and manufactures central processing units, or CPUs, for PC and data center end markets. We believe Intel’s narrow moat is predominant in these business lines. Intel’s cost advantage is manifested via large scale semiconductor fabrication facilities that cost $20 billion-plus and create significant barriers to entry. Intel’s only competition for leading-edge semiconductor manufacturing is TSMC (TSM) and Samsung (SSNHZ). Semiconductor manufacturing is inherently capital-intensive and thus requires methodical planning and execution to keep the cost per chip at a reasonable level. Intel accomplishes this through investments in the latest process technologies.”
—Abhinav Davuluri, strategist
- Ticker: NXPI
- Fair Value Estimate: $225
- Stock Price: $188.46
“NXP Semiconductors is one of the largest suppliers of semiconductors for the automotive market and a significant force in the analog and mixed signal chip markets generally. We believe the firm has a durable position in the automotive, industrial, mobile, and communications infrastructure markets due to a combination of switching costs and intangible assets. Although the company sells into cyclical industries, the strength of these competitive advantages gives us confidence that the firm will generate excess returns over the cost of capital over the next decade.”
“The merger of Freescale and the former NXP in 2015 has led to a powerhouse in automotive semiconductors, which makes up about 50% of NXP’s total revenue. Like many of its chipmaking peers, NXP is well positioned to benefit from safer, greener, smarter cars in the years ahead. NXP is among the market leaders in automotive semis, especially in microcontrollers, that serve as the brains of a variety of electronic functions in a car. We’re optimistic about NXP’s development of products used in active safety systems, such as 77-gigahertz radar modules and battery management systems in upcoming electric vehicles, most notably from Volkswagen VLKAF.”
—Brian Colello, senior director