Semiconductor stocks have finally started to drop after outperforming from March 2020 to January 2022. There are valid reasons to worry about the downside including a cyclical downturn in tech spending. However, the industry is poised for long-term growth, and these 3 stocks are trading at very attractive valuations: Intel (INTC), Broadcom (AVGO), and ChipMOS (IMOS).
Since the stock market bottom in March 2020, one of the strongest industries within the tech sector has been semiconductors. Over this timeframe, the VanEck Vectors Semiconductor ETF (SMH) is up 147%, which is significantly better than the S&P 500’s 92% gain.
The major reason for this outperformance was increased spending on technology by businesses and consumers during the pandemic. Demand outstripped supply, leading to increased revenues and pricing power for companies and even shortages for certain chips. In recent months, the industry has experienced a correction, which is allowing investors to scoop up shares at more attractive entry points.
Further, underlying trends remain favorable for semiconductor stocks as business spending on technology remains strong. Recent earnings reports have also revealed which companies are continuing to gain momentum and are well-positioned to make new highs. Here are 3 semiconductor stocks with considerable upside that investors should consider buying now: Broadcom (AVGO), ChipMos Technologies (IMOS), and Intel (INTC).
AVGO operates through two segments: infrastructure software solutions and semiconductors. Its chips are found in all sorts of products including iPhones, computers, and networking equipment. Thus, the company has benefitted from the iPhone sales as well as increased spending with 5G adoption.
Its infrastructure software is used to manage data centers and has seen substantial growth with cloud computing. Semiconductors account for 75% of revenue but infrastructure software is growing faster and comes with bigger margins.
Given its exposure to two, different parts of the tech industry with both growing at double-digit rates, it’s not surprising that the company has quite impressive earnings growth over the last few years. Over the last 5 years, AVGO’s revenues have increased by 60%, and its free cash flow by 153%.
This momentum has continued with its recent earnings report which showed earnings growth of 27% and 16% revenue growth. It also issued better than expected guidance for the next quarter at $7.9 billion vs $7.5 billion, which implies an acceleration to 20% revenue growth.
AVGO’s POWR Ratings confirm its bullish earnings outlook. The company has an overall A rating, which translates to Strong Buy in our proprietary ratings system. The POWR Ratings assess stocks by 118 different factors, each with its own weighting. A-rated stocks have posted an average annual performance of 31.1% which handily beats the S&P 500’s 8.0% average annual gain over the same period.
ChipMos Technologies (IMOS)
IMOS researches, develops, manufactures, and sells high-integration and high-precision integrated circuits and related assembly and testing services internationally. It operates through Testing; Assembly; Testing and Assembly for LCD, OLED, and other Display Panel Driver Semiconductors; Bumping; and Other segments. The company is headquartered in Hsinchu, Taiwan.
IMOS has some similarities with AVGO such as a low valuation and above-average dividend. Currently, IMOS has a P/E of 7.5 and a 4.4% dividend yield. Both are considerably higher than the S&P 500’s P/E of 25 and 1.3% dividend yield. This valuation looks even better when considering that it has nearly 20% of its market cap in cash, increasing the chances of dividend hikes or share buybacks.
IMOS focuses on backend solutions for other semiconductor companies. More specifically, IMOS is an outsourcing company that provides semiconductor assembly and testing for final placement in devices by their clients. Therefore, the company’s revenues are well-diversified in terms of customers and product segments. This also means that it’s well-positioned for growth over the next couple of years as the industry invests in new production capacity.
Given this combination of growth and value, it’s not surprising that IMOS has an overall B rating, which equates to a Buy in our POWR Ratings system. In terms of component grades, IMOS has an A for Value due to its low P/E. It also has a B for Momentum as the company has demonstrated relative strength during this market correction relative to its peers. Click here to see additional POWR Ratings for IMOS including Industry, Growth, and Stability.
INTC is one of the world’s largest chip makers in terms of both design and manufacturing. Until a couple of years ago, INTC was the clear leader in terms of processors but has been displaced by AMD (AMD). It’s also lost its leadership in terms of manufacturing to Taiwan Semiconductor (TSM).
However, INTC continues to be a cash-cow as it generated $22.6 billion in free cash flow in 2021. The company also has a solid plan in place to pivot its business with a goal to become the leading semiconductor manufacturer by 2025. To this end, the company is investing $33 billion in production facilities in Europe with governments contributing another $7 billion. In the US, it is spending $40 billion with another substantial sum expected to arrive from the CHIPS act.
The events in Ukraine have increased the urgency of its project as it clearly has national security and economic implications. Semiconductor shortages have had all sorts of negative downstream effects on other industries. It’s also concerning that a fair chunk of the world’s semiconductor production is in Taiwan which could be at risk in the event of a Chinese invasion.
Another attractive part of INTC is its ownership of MobilEye. This is one of the leading companies in the autonomous driving space. INTC is looking to spin off MobilEye as its own entity although it will retain a majority stake. This should help it realize greater value from the investment given that it should trade at a higher multiple than INTC.
INTC’s strong fundamentals and turnaround are reflected in its POWR Ratings. The stock has an overall A rating, which indicates a Strong Buy in our proprietary rating system.
In terms of component grades, INTC has a B for Value due to having a forward P/E that is nearly half of the S&P 500. It also has a Sentiment grade of B due to a consensus price target of $56.7, implying 17% upside. Click here to see the complete POWR Ratings for INTC including Growth, Momentum, Industry, and Stability.
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INTC shares were trading at $44.87 per share on Tuesday morning, down $0.09 (-0.20%). Year-to-date, INTC has declined -12.21%, versus a -11.84% rise in the benchmark S&P 500 index during the same period.
About the Author: Jaimini Desai
Jaimini Desai has been a financial writer and reporter for nearly a decade. His goal is to help readers identify risks and opportunities in the markets. He is the Chief Growth Strategist for StockNews.com and the editor of the POWR Growth and POWR Stocks Under $10 newsletters. Learn more about Jaimini’s background, along with links to his most recent articles.
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