The annual Computer Electronics Show (CES), which bills itself as “the most influential tech event in the world,” marked the start of 2022. CES 2022 is an opportunity for technology companies to showcase their upcoming products. It also marks a seasonal peak for tech stocks. Investors tend to buy picks in the sector — like semiconductor stocks — ahead of the event, and then sell them. They expect the technology companies will not post anything new afterward.
The seasonal selling pressure may not show up this year. Covid is still disrupting public events and supply chains. Tech firms could also adjust their press release schedule. They might announce some of their new products and wait until later in the year to share bigger news.
For investors focused on the long-term, tech firms will continue thriving in 2022 and beyond. One crucial factor impacting the tech sector is semiconductors, which are vital to much of the technology that is seeing high demand. Chipmakers stand to benefit this year and beyond as they supply components needed across several sectors.
The semiconductor cycle is amid a secular growth phase. Demand for automobiles, personal computers, mobile phones and cloud computing will rise again this year. Prices will remain at current levels or increase due to tight supply chains.
With that backdrop in mind, these seven semiconductor stocks have the most upside potential this year:
- Advanced Micro Devices (NASDAQ:AMD)
- Intel (NASDAQ:INTC)
- MACOM Technology (NASDAQ:MTSI)
- Micron Technology (NASDAQ:MU)
- NVIDIA (NASDAQ:NVDA)
- Ultra Clean Holdings (NASDAQ:UCTT)
- United Microelectronics (NYSE:UMC)
Stocks with scores in green have a good score.
From the quantitative scores supplied by Stock Rover, most companies score well on all metrics, especially on quality and growth. Companies that have weak value scores may risk a brief correction. However, investors are used to this volatility. Many semiconductor stocks trade at a premium because they offer strong growth in the year ahead.
Semiconductor Stocks: Advanced Micro Devices (AMD)
In the high-end gaming market, Advanced Micro Devices (AMD) dominates. This year, it will solidify its product offerings with the release of a Ryzen 9 6980HX mobile chip. The central processing unit (CPU) is a positive inflection point for AMD. Taiwan Semiconductor (NYSE:TSM) will manufacture the chip with its 6-nanometer process.
The chip is a gamechanger for the laptop gaming market because of its small size. It also runs on 5 gigahertz and will need only 45 watts of power. The company’s new Ryzen 9 6900HX will have the same 8 cores and 16 threads as the 6980HX, but will run slightly slower. AMD could sell this chip to gamers for less.
In the graphics market, AMD will consolidate its market share with a mobile Radeon RX 6850XT. The graphics processing unit (GPU) will have plenty of memory and good performance.
Wall Street is cautious with AMD stock. The fair value is $143.71, according to Tipranks. Consider waiting for the stock to pull back first before buying. AMD already enjoyed a strong run-up in the last year.
Intel (INTC)
Intel is slowly catching up to AMD in the personal computer (PC) chip space. Its newer Alder Lake processor performs better than the i7-11900K series that preceded it. Additionally, its GPU segment is a potential catalyst that can unlock the discount in INTC stock.
Intel trades at a low price-to-earnings multiple. The company needs consumers to warm up to its discrete GPU release set for the first quarter. What might be better news is that Intel will reportedly release two DG2 Gaming GPUs in March.
Arc Alchemist, its new GPU series, will feature at least three cards. Its high-end offering will have 16GB of GDDR6 memory. Consumers will get the equivalent of the Nvidia GeForce RTX 3070’s or 3070 Ti’s performance with this Intel product.
Intel has a good chance of undermining Nvidia and AMD by becoming a major supplier of graphics cards. In 2021, both firms refreshed their GPUs with minimal performance enhancements. They raised the prices, taking advantage of the chip shortage and the overwhelming demand exceeding supply levels.
Semiconductor Stocks: MACOM Technology (MTSI)
Macom develops radio and wave semiconductor devices and components. It posted a strong fiscal fourth quarter that reaffirmed the business strength will continue.
In Q4, Macom posted revenue of $155.2 million. The gross margin was 58.1%. It enjoyed a net income of $17.1 million, or 24 cents a diluted share. In the current first quarter ended Dec. 31, 2021, Macom expects revenue of up to $161 million. The gross margin will be between 60% and 62%.
By 2025, Macom is on a good trajectory to reach its $1 billion revenue target. Chief Executive Officer Steve Daly said the company is starting the year with almost a near-record backlog. It is bringing better products to market. That suggests a margin expansion and higher profits for the long term.
Just as other chip firms are constrained, Macom is, too. For example, it has supply disruptions that have an impact on its capacity. This is hurting its assembly and test activity. Customers are adjusting to the delays by pushing out their system build schedules.
Micron Technology (MU)
Memory provider Micron posted strong quarterly results. CEO Sanjay Mehrotra said that the data economy is still in the early phases. This economy includes sectors like artificial intelligence, electric vehicles and data centers.
Micron is ramping up the release of 1-alpha dynamic random-access memory (DRAM) and 176-layer NAND products. Helped by strong demand in the first quarter, it will deliver record revenue in fiscal 2022. Unlike many hyped technology firms that lose money, Micron will post robust profitability. Tech investors tired of losing money in speculative stocks should consider MU stock instead.
Micron trades at a forward price-to-earnings ratio below that of the industry. As the table shows above, Micron scores a 91/100 on value.
The chip giant will work through the supply constraints by securing components. Eventually, the supply shortage will ease throughout 2022. Investors should expect Micron’s profit margins to expand next. At current valuations, Micron is still a discounted stock.
Readers may build a five-year discounted cash flow growth exit model. Revenue growth may slow in that period. The model still implies a fair value of more than $102.
Semiconductor Stocks: NVIDIA (NVDA)
Nothing highlights the extent of the GPU shortage quite like this story of a shopper being shut out by a cashier when buying an RTX 30-series card. Gamers need to spend more than $3,000 for an Nvidia RTX 3090, or around $1,500 for an RTX 3080. This is above the launch price of $699 for the RTX 3080.
Instead of waiting for prices to fall, consumers may rent Nvidia’s RTX 3080 power through its cloud gaming service. GeForce Now will potentially add plenty of recurring subscription revenue. It offers three membership tiers: free, priority and RTX 3080. The varying performance levels will appeal to gamers of all types.
Nvidia is not asking much from gamers interested in the service. This will lift the company’s margins for 2022. With the chip shortage showing no signs of easing, Nvidia may increase its monthly subscription rate to maximize profits.
More recently, Meta’s (NASDAQ:FB) investments in the metaverse will benefit Nvidia and AMD. Virtual worlds will need graphics chip power. As Nvidia sells more GPU cards and online services, its revenue will grow at strong rates for years to come.
Ultra Clean Holdings (UCTT)
Ultra Clean Holdings supplies critical subsystems, components and parts for semiconductors. It also offers purity cleaning solutions for the chipmaking industry.
In the third quarter, UCTT posted revenue growth of 52.4% year-over-year (YOY). It earned $1.07 a share on a non-GAAP basis (and 70 cents in GAAP EPS.) The company is growing quickly because it supplies many critical elements related to the semiconductor production process. With the chip shortage, customers cannot risk further delays related to packaging and test failures.
UCTT will expand its market by growing in four segments. It currently gains most of its revenue from its service, non-semiconductor, foundry and logic wafer fab equipment (WFE), and memory WFE offerings (per slide 10.)
The company navigated the supply bottlenecks well in the last quarter. It is working with its supply chain team to plan for delayed deliveries. By communicating setbacks with customers, UCTT will not lose its business.
Furthermore, it actively engages with suppliers. UCTT uses a collaborative planning and forecasting model. It has a strong sense of its output capability. Customers across key markets appreciate its timely deliveries.
Semiconductor Stocks: United Microelectronics (UMC)
United Microelectronics (UMC) is a global semiconductor foundry company in the integrated circuit fabrication market. Expect its strong revenue growth to continue this year.
For October 2020, UMC said that revenue grew by 25.36%. Additionally, the average selling prices for the 8-inch wafer equivalent will likely rise in the year ahead.
Notably, Asia accounted for 65% of revenue in Q3. Yet North America has strong demand and was only 22% of UMC’s business. As demand from communications grows, this chip company may beat investor expectations.
In the third-quarter conference call, CEO Jason Wang said that the P5, 10-K expansion (28 nanometers) would come online in Q2 2022. Its P6 expansion will come online late in 2023. The company has a systematic ramp schedule that will fuel its operating margin expansion in the next few years.
UMC is among the safest tech firms for investors. It has a disciplined capital expenditure philosophy. Even though the market is hot, the company is not overextending itself to chase profits. Instead, it drives a sustainable structure by limiting capex spending.
UMC always aligns its offerings with customer demand. Only after that review does the company make spending decisions.
On the date of publication, Chris Lau did not have (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.
Chris Lau is a contributing author for InvestorPlace.com and numerous other financial sites. Chris has over 20 years of investing experience in the stock market and runs the Do-It-Yourself Value Investing Marketplace on Seeking Alpha. He shares his stock picks so readers get original insight that helps improve investment returns.
