These chip stocks can withstand the current technology bear market.
Between late 2021 and mid-2022, the technology sector has gone from hot to cold. That’s in large part due to broader macroeconomic factors. The societal effects of the COVID-19 pandemic caused unprecedented demand for electronic devices of all sorts. Vendors saw record demand across a variety of fields, including automobiles, consumer electronics and data servers. However, the semiconductor industry now has to adapt to a variety of challenges. These include supply chain issues, rising tensions between China and Taiwan, and a rapidly changing demand landscape as the stay-at-home tail wind fades. Unsurprisingly, semiconductor shares have sold off as part of the broader tech wreck. But that also creates more opportunity in the industry. With that in mind, here are seven of the best semiconductor stocks to buy for the rest of 2022.
Taiwan Semiconductor Manufacturing Co. Ltd. (ticker: TSM)
Taiwan Semiconductor, or TSM, is the largest semiconductor company in the world by market capitalization. It recently reclaimed that honor from Nvidia Corp. (NVDA). TSM is not the most glamorous semiconductor business, since it primarily does contract manufacturing for others rather than launching new chip designs itself. However, being the leading semiconductor foundry has been an exceptionally profitable business, and that’s doubly true now that the world faces a semiconductor shortage. As the world races to secure vital chip supplies, all roads have led through TSM’s manufacturing facilities. The company is, not surprisingly, planning to raise prices once again in 2023 following a steep hike in 2022 to take advantage of the current boom in the industry. Despite the favorable industry dynamics, TSM stock has fallen more than 22% year to date through May 17 amid the broader tech-sector rout. With that decline, Taiwan Semiconductor shares trade for about 16 times forward earnings.
Micron Technology Inc. (MU)
Semiconductor storage and memory chip leader Micron has seen shares slump 20% in 2022 through May 17. Shares are now trading at less than 8 times analyst estimates for 2022 earnings and an astonishingly low 4.2 times enterprise value to earnings before interest, taxes, depreciation and amortization, a metric known as EV/EBITDA. Even more cyclical tech hardware companies tend to trade at a double-digit price-earnings ratio and something closer to 7 or 8 times EV/EBITDA. Why are traders practically giving away shares of Micron at present? Historically, data storage has been a boom/bust industry and folks fear another bust. That’s not unwarranted, as technology sales may lose momentum following the recent work- and learn-at-home boom. Still, the memory industry has consolidated dramatically, so Micron should have more pricing power. And at such a high present rate of earnings, Micron can return a ton of capital to shareholders.
Amkor Technology Inc. (AMKR)
Amkor is in some ways similar to Micron. It is another semiconductor firm selling at an unbelievably low valuation due to investor worries around the economic cycle. Shares are going for around 7 times analyst estimates of both 2022 and 2023 earnings. This indicates that even with the company’s earnings expected to be steady in coming quarters, traders are bracing for the worst. A slump is far from guaranteed, however. That’s because Amkor is a middleman in the semiconductor industry. It offers testing and packaging solutions for other semiconductor manufacturing companies. Thus, it benefits from the overall health of the semiconductor industry rather than being a bet on any particular company, chipset or line of electronic products. Regardless of where the economy goes tomorrow, long-term trends such as the “internet of things” and autonomous vehicles should drive further demand for Amkor’s services.
Camtek Ltd. (CAMT)
Like Amkor, Camtek offers investors leverage to the growth of the semiconductor industry as a whole. That’s because Camtek supplies inspection and metrology devices and services to semiconductor manufacturing companies. In other words, Camtek is a sort of “picks-and-shovels” vehicle for the sector. As the semiconductor giants pour tens of billions of dollars into new capital projects, it will increase the amount of money flowing through all parts of the supply chain. Analysts fear a slowdown in semiconductor demand; however, there are many new semiconductor foundries being planned that would offset that. Camtek has tripled earnings since 2018, and analysts see further growth ahead. Meanwhile, the stock has dropped nearly 40% year to date through May 17, leaving shares at just 16 times this year’s estimated earnings.
Intel Corp. (INTC)
Intel is a leading semiconductor pick because it’s one of the most compelling ways to get broad-based exposure to the semiconductor industry. Intel’s main business, selling PC and server chips, remains a cash cow. For years, it was considered a stagnant industry, but the pandemic gave a big boost to sales as people purchased machines for working and studying from home. The company has also invested heavily in other lines of semiconductor business over the years. One of these, the autonomous vehicles and self-driving unit Mobileye, is supposed to be spun off this year, generating a profit for Intel that could number in the tens of billions of dollars, though admittedly that could be delayed given current market conditions. Regardless, INTC stock is one of the cheapest blue-chip stocks around. Shares are selling for less than 13 times forward earnings and offer a 3.4% dividend yield.
Texas Instruments Inc. (TXN)
Texas Instruments has been in a downtrend this year despite reporting strong operating earnings. Part of that is simply due to the difficult market. However, investors are also nervous because Texas Instruments is entering a large capital expenditure cycle for new equipment and related items. This is a change in the company’s strategy. Management is clear about prioritizing the investment options that will generate the most additional free cash flow per share. In the past, that’s largely been repurchases of Texas Instruments stock. The company has reduced its share count by 46% since 2004. Now, however, management sees new manufacturing capacity as a better use of resources than heavy share buybacks. This has caused traders to flee the company. However, Texas Instruments deserves the benefit of the doubt; it’s one of the best long-term performers in the semiconductor industry, and its focus on slower-moving analog chips insulates it from a good deal of competition.
Analog Devices Inc. (ADI)
Analog Devices is, as its name would suggest, another analog semiconductor firm. It shares many of the positive features of Texas Instruments. Analog derives most of its revenue from a vast array of niche products. This lack of revenue concentration protects the business model from competition or sudden technological obsolescence. It also gives Analog exposure to a wide variety of promising technological trends such as connected cars, smart devices and remote monitoring applications. Analog shares are trading for about 19 times forward earnings. The company is also intriguing as an income play. The stock yields 1.9%, and Analog has increased its dividend for 18 years in a row. More broadly, management pays out nearly all of its cash flow as dividends and share buybacks, which aligns its profits with shareholder returns.
7 best semiconductor stocks to buy for 2022:
— Taiwan Semiconductor Manufacturing Co. Ltd. (TSM)
— Micron Technology Inc. (MU)
— Amkor Technology Inc. (AMKR)
— Camtek Ltd. (CAMT)
— Intel Corp. (INTC)
— Texas Instruments Inc. (TXN)
— Analog Devices Inc. (ADI)
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Update 05/18/22: This story was published at an earlier date and has been updated with new information.