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The 3 Most Undervalued Semiconductor Stocks to Buy: October 2023

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  • Tighter financial conditions do not outweigh the effects of a strong labor market and consumer spending shaping the United States economy to be resilient.
  • Qualcomm (QCOM): Strong product line, entrance into generative AI, and extensive partnerships bolster growth.
  • KLA Corporation (KLAC): Precision and quality assurance tools meet stringent demands of high-speed, low-latency communication.
  • Alphabet (GOOGL): 84% share over the worldwide desktop search engine market and full switch to custom chips.
semiconductor stocks - The 3 Most Undervalued Semiconductor Stocks to Buy: October 2023

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After 18 months of rising borrowing costs, the United States economy is now grappling with tighter financial conditions. The Federal Reserve’s interest rate hikes have created the most stringent financial conditions in a year, primarily due to renewed losses in asset prices. Small and regional banks, critical for local businesses and employment, are showing renewed vulnerability, which could restrict access to credit and increase costs for individuals and corporations.

These financial pressures may result in economic headwinds, but not enough to cause a recession because of a strong labor market and consumer spending. The strong labor market and consumer spending have continually proven to bode well for long-term growth and the successes of the economy.

In particular, now is the perfect time to purchase semiconductor stocks as these financial pressures are making these three stocks undervalued and they are set to skyrocket in growth.

Qualcomm Incorporated (QCOM)

Why You May be Finding it Hard to Commit to QCOM Stock
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Qualcomm (NASDAQ:QCOM) specializes in semiconductor design and manufacturing, specifically for 5G and AI innovations. QCOM stock is down 2.26% YTD.

Qualcomm reported below-average Q3 earnings, with revenue of $8.44 billion, a decrease of 22.7% YoY and a miss by $70 million. However, its EPS of $1.87 beat expectations by $0.06. The global semiconductor industry is projected to grow at a 12.2% CAGR, from $573.44 billion in 2022 to $1.38 trillion by 2029. 

Yahoo! Finance reports 28 analysts with a mean 1-year price target of $128.37, with prices ranging from $94.31 to $146.18. Many notable firms predict upsides for the company with buy ratings.

Qualcomm has teamed up with Alphabet (NASDAQ:GOOGL,NASDAQ:GOOG) to bring a RISC-V-based wearables solution for use with Wear OS by Google. The company says that this framework will allow more products in its ecosystem to take advantage of custom CPUs, offering higher performance for lower power.

Micron (NASDAQ:MU) has also started shipping samples of its LPDDR5X memory for collaborative use with Qualcomm’s flagship mobile platform. This combination allows smartphone manufacturers to advance AI technology.

Finally, Qualcomm introduced its new AI-focused chips for both PCs and smartphones that can handle AI models used in generative AI. This is important for the company, as its chips have been including AI portions since 2018. With the Gen 3 running 30x faster than last year’s Gen 2, Qualcomm is bound to receive AI boom benefits.

Despite finances being down in the latest quarter, Qualcomm’s solid product line, entrance into generative AI, and extensive partnerships will propel the company into future growth, making this dip the perfect time to buy.

KLA Corporation (KLAC)

a KLA sign in a garden
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KLA Corporation (NASDAQ:KLAC) is a company specializing in process control and yield management systems for the semiconductor industry. Offering a high-quality diverse product portfolio, KLA is a strong competitor within its sector.

KLAC stock is up 20.79% YTD. Analysts rate this stock as a “buy,” and have projected an average price of $529.89 from the undervalued current price of $454.84.

The semiconductor industry is forecasted to grow from $527.88 billion in 2021 to 1,380.79 billion in 2029, showcasing a CAGR of 12.2%. Because semiconductors continue to be an integral factor in the construction of computers, rising demand for consumer technology is augmenting industry growth. Additionally, the automotive sector has recently been using more semiconductors for electric vehicles and self-driving systems.

Last year, KLA experienced a 19.23% increase in sales growth. Additionally, the company’s free cash flow increased by 10.74% YoY, and EBIT grew from $3,648 million to $4,013 million over the last year. These financials indicate healthy growth and stability for KLA.

A key catalyst for KLA’s success is its diverse and expanding product portfolio. By providing a wide range of goods and services to various industries, the company can make a significant impact on some of the most innovative technologies.

For instance, KLA offers inspection tools for the automotive industry to minimize defects. Beyond the automotive industry, KLA’s impact extends further into the realm of emerging technologies. The company’s products are integral to the production of 5G components, a technology that promises to revolutionize global communication networks. KLA’s precision and quality assurance tools are instrumental in ensuring that these critical components meet the stringent demands of high-speed, low-latency communication.

In essence, KLAC at its undervalued price proves to be a promising semiconductor stock due to its wide variety of products and strong financial record. 

Alphabet Incorporated (GOOGL)

Google launches Bard AI. Google search bar on a phone in hand with release information on background. Google Bard AI vs OpenAI ChatGPT. GOOG stock and GOOGL stock.
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Google is a multinational technology conglomerate that provides services such as Google Cloud to companies and consumers worldwide.

GOOGL is up 40.94% YTD. The stock has received 28 “buy” ratings and zero “sell” ratings, indicating that analysts are very bullish on long-term growth prospects.

GOOGL currently trades at a P/E ratio of 24.84. With its cheap price and its history of earnings growth from $13.91 billion in net income during Q3 2022 to $19.69 billion in Q3 2023, GOOGL is well-positioned for success. 

Moreover, the global search engine market – Alphabet’s main source of revenue – is projected to grow at a CAGR of 11.0% from 2021 to 2031. Alphabet dominates almost 84% of the worldwide desktop search engine market, allowing it to take full advantage of the sector’s future growth. 

Google is undergoing a significant transition by shifting towards fully custom chips, and it has partnered with Taiwan Semiconductor Manufacturing to manufacture these chips, known as Tensors.

In this transition, Google has been collaborating with Samsung, not only for assistance in the design of the Tensors but also for their manufacturing. The company had initially planned to introduce a fully custom chip, codenamed “Redondo,” as part of its 2024 Pixel 9 series. However, Google has decided to extend its partnership with Samsung for an additional year, which has resulted in pushing the release of the fully custom chip to 2025, indicating high growth prospects in the long term at its success rate.

With Alphabet dominating its market and the reveal of Redondo in the coming years, GOOGL stock is set to explode in growth.

On the date of publication, Michael Que 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.

Michael Que is a financial writer with extensive experience in the technology industry, with his work featured on Seeking Alpha, Benzinga and MSN Money. He is the owner of Que Capital, a research firm that combines fundamental analysis with ESG factors to pick the best sustainable long-term investments.


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