- Broadcom (AVGO) — A leader among semiconductor stocks, AVGO excels in two different tech areas.
- ChipMos Technologies (IMOS) — Investors can rely on IMOS stock for its low valuation and solid dividends.
- Intel (INTC) — Intel is aiming to become the top semiconductor manufacturer by 2025.
Since the stock market bottom in March 2020, one of the strongest industries within the tech sector has been semiconductor stocks. Over this timeframe, the VanEck Vectors Semiconductor ETF (NASDAQ:SMH) is up 191%, which is significantly better than the S&P 500’s 109% gain.
The major reason for this outperformance was increased spending on technology by businesses and consumers during the pandemic. Demand outstripped supply even as some factories suspended production, 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 three semiconductor stocks with considerable upside that investors should consider buying now:
Broadcom (NASDAQ:AVGO) splits its business into two segments: infrastructure software solutions and semiconductors. Its chips are found in Apple (NASDAQ:AAPL) iPhones plus all sorts of computers and networking equipment. Thus, the company has benefitted from 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 76% of revenue but infrastructure software is growing fast as well and comes with bigger margins.
Given its exposure to two different parts of the tech industry, with both growing impressively, it’s not surprising that the company has seen solid earnings growth recently. Over the last five 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, which implies 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)
ChipMos Technologies (NASDAQ:IMOS) researches, makes and sells “high-integration and high-precision integrated circuits and related assembly and testing services” internationally. 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 price-earnings ratio of 7.5 and a 4.5% dividend yield. Both are considerably higher than the S&P 500’s P/E of 25.8 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 offers backend solutions for other semiconductor firms. 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.
The last of our semiconductor stocks, Intel (NASDAQ: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 (NASDAQ:AMD). It’s also lost its leadership in terms of manufacturing to Taiwan Semiconductor (NYSE:TSM).
However, INTC continues to be a cash-cow as it generated $11.3 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 euros in production facilities in Europe with governments contributing another $7 billion.
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..
On the date of publication, Jaimini Desai did not have (either directly or indirectly) positions in any of the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.
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