4 Undervalued Semiconductor Stocks

“PC
and
smartphone
chip
demand
is
recovering
from
cyclical
bottoms
in
2022-23,”
says Brian
Colello,
technology
equity
strategist
for
Morningstar.
“Industrial
chip
demand
seems
to
be
mired
in
the
bottom
of
a
downturn
in
the
first
quarter,
although
firms
are
seeing
some
green
shoots
that
suggest
a
recovery
in
the
second
half
of
2024.
Automotive
chip
demand
is
the
biggest
question
mark
heading
into
first-quarter
earnings.”

Against
this
mixed
backdrop,
here
are
our
analysts’
top
semiconductor
stock
picks,
each
of
which
is
undervalued:

•
Infineon
Technologies (IFNNY)
•
STMicroelectronics STM
•
MediaTek (2454)
•
Skyworks
Solutions (SWKS)

Colello
favours
Infineon
and
STMicroelectronics
because
of
their
lower
valuations.

Semiconductor
Stock
Valuations

The
past
year’s
rally
in
semiconductor
stocks
removed
many
bargains
from
the
space.
A
year
ago,
the
median
digital
and
analog
semis
stock
under
Morningstar’s
coverage
was
13%
undervalued
on
a
price/fair
value
basis.
Today
the
industry
is
1%
overvalued.

However,
it’s
not
a
uniform
picture
for
valuations
of
semiconductor
stocks.
There
is
a
“divergence
across
categories,”
says
Colello.
“Digital
chipmakers
appear
overvalued
to
us
–
the
rise
of
AI
is
reasonably
priced
into
shares
of
industry
leader
Nvidia
–
but
other
AI
names
appear
too
pricey.
Analog/mixed-signal
chip
valuations
are
still
below
our
fair
value
estimates,
as
near-term
automotive
and
industrial
demand
is
sluggish
and
inventory
levels
rise.”

The
AI
Semiconductor
Stock
Rally

The
surge
in
semiconductor
stocks
was
kicked
off
last
May
by
Nvidia’s
massive
earnings
beat,
fueled
by
AI-related
demand
for
its
chips.
Nvidia
stock
is
up
226%
in
the
12
months
and
up
more
than
75%
in
2024
alone.
Colello
says
the
AI
“gold
rush”
is
on,
and
Nvidia
is
the
greatest
beneficiary.
Advanced
Micro
Devices (AMD),
which
also
designs
GPUs,
has
similarly
seen
its
stock
jump
78%
in
the
past
12
months.

Colello
sees
Nvidia
as
the
biggest
beneficiary
of
the
AI
“Gold
Rush.”

“The
primary
story
in
semis
in
recent
quarters
has
been
the
massive
rise
in
revenue
in
AI
accelerators,
led
by
Nvidia’s
Data
Center
GPU
business,”
he
says.
“We
surmise
that
a
wide
array
of
businesses
are
seeking
to
build
and
deploy
AI
models,
and
such
investments
will
occur
in
good
times
or
bad.,”
he
says.

“We
think
more
stellar
demand
for
Nvidia’s
AI
products
is
in
the
cards
for
2024,
as
demand
should
continue
to
outpace
supply
in
the
next
few
quarters,”
Colello
says.

Colello
notes
that
Nvidia’s
data
centre
revenue
rose
fivefold
from
2019
to
2022,
and
then
more
than
tripled
in
2023.
“We
expect
it
to
more
than
double
in
2024….
Given
massive
AI
investments
and
supply
constraints,
we
foresee
Nvidia’s
GPU
revenue
as
locked
in
for
most,
if
not
all,
of
2024,
and
perhaps
2025
as
well,”
he
says.

Those
gains
have
helped
the Morningstar
US
Semiconductor
Index rally
106.54%
last
year
and
34%
in
2024
so
far.
Meanwhile,
the Morningstar
US
Market
Index is
up
5.78%
this
year.

The
Digital/Analog
Stock
Divide

As
demand
increases
for
generative
AI,
Morningstar
analysts
predict
that
companies
will
continue
to
invest
in
this
space
regardless
of
the
strength
of
the
global
economy.
While
digital
chipmakers
will
likely
ride
the
AI
wave,
it’s
different
for
analog
and
mixed-signal
semiconductor
stocks

The
sluggish
demand
for
PCs
and
smartphones
in
early
2023
impacted
analog
and
mixed-signal
semis
in
addition
to
digital
ones.
Many
of
these
firms
create
accessories
like
keyboards
and
headsets,
and
they
thus
depend
on
PC
and
phone
demand.
Analog
and
mixed-signal
semis
also
include
automotive
chipmakers.

“After
two
years
of
peak
business
conditions
in
2021
and
2022,
analog/mixed-signal
revenue
started
to
roll
over
at
the
end
of
2023,
and
we
anticipate
that
a
cyclical
downturn
will
weigh
on
the
industry
in
2024,”
says
Colello.
“We
still
see
many
signs
of
a
cyclical
slowdown,
including
higher
inventory,
lower
order
backlogs,
and
faster
delivery
lead
times.
Short-term
selloffs
in
these
stocks
are
often
good
times
to
buy,
as
this
sub-segment
of
semis
has
many
moaty
businesses
that
can
weather
any
looming
storm.”

Throughout
2023,
automotive
chip
sales
outpaced
US
vehicle
sales,
thanks
to
rising
chip
content
per
car
and
a
favorable
mix
shift
toward
electric
vehicles.
This
provided
tailwinds
for
firms
like
Texas
Instruments TXN and
Analog
Devices ADI,
but
they’re
subsiding
as
car
inventory
rises.

“We
now
fear
that
auto
chip
inventory
exceeds
end-market
demand,”
says
Colello.
“It’s
unclear
to
us
whether
too
many
chips
sit
on
the
shelves
of
[manufacturers],
or
if
the
car
companies
built
too
many
cars
or
the
wrong
types
of
cars—that
is,
too
many
electric
vehicles
and
not
enough
gas-powered
ones.
If
EV
demand
weakens
more
than
anticipated,
the
automotive
chip
industry
may
face
an
even
more
severe
cyclical
downturn
in
2024.”

The
personal
electronic
industry
outlook
is
also
cloudy.
“Just
as
we’ve
seen
with
digital
chipmakers,
analog/mixed-signal
chipmakers
exposed
to
consumer
electronics
suffered
in
early
2023
from
the
sluggish
demand
environment
for
PCs
and
smartphones,”
Colello
explains.
“We
don’t
expect
an
immediate
bounceback
in
2024
either,
especially
as
some
of
the
inventory
overhang
plaguing
the
industrial
and
automotive
segments
might
be
bleeding
into
consumer
electronics
too.”

For
the
long
term,
“we
still
don’t
consider
consumer
electronic
devices
to
be
great
markets
for
most
chipmakers,
relative
to
automotive,
industrial,
or
data
center,”
Colello
says.

Here’s
a
closer
look
at
the
four
semiconductor
stocks
Morningstar’s
equity
analysts
consider
top
picks.
MediaTek
does
not
have
US-listed
shares;
it
trades
on
the
Taiwan
Stock
Exchange.

Morningstar
Metrics
for
Semiconductor
Stocks

Infineon
Technologies

•

Fair
Value
Estimate:
$54.00
•

Morningstar
Rating: ★★★★
•
Morningstar Economic
Moat
Rating:
Narrow
•
Morningstar Uncertainty
Rating:
High
•
Forward
Dividend
Yield:
1.05%

“Infineon
Technologies
is
one
of
our
top
picks
in
the
analog
and
mixed-signal
chip
space.
We’re
particularly
bullish
about
the
company’s
opportunities
in
automotive
semis,
which
make
up
over
40%
of
revenue.
Infineon
is
the
worldwide
leader
in
power
semis,
and
given
the
electrification
of
the
car
and
the
rise
of
electric
vehicles,
the
company
should
be
well
positioned
to
aid
in
automotive
powertrain
development
over
the
next
decade,
including
the
adoption
of
silicon
carbide-based
semis.
We
anticipate
nice
SiC
adoption
in
its
industrial
segment,
aiding
in
the
rollout
of
renewable
energy
products,
power
infrastructure,
and
industrial
automation
products.”

STMicroelectronics

• Fair
Value
Estimate:
$66.00
• Morningstar
Rating: ★★★★
• Morningstar Economic
Moat
Rating:
Narrow
• Morningstar Uncertainty
Rating:
High
• Forward
Dividend
Yield:
0.85%

“STMicroelectronics
is
one
of
our
top
picks
in
the
analog
and
mixed-signal
chip
space.
The
company
has
healthy
exposure
to
the
automotive
market
with
leadership
in
silicon-carbide-based
semis,
thanks
to
its
strong
partnership
with
Tesla
and
rising
content
in
EVs
with
other
carmakers.
ST
has
also
fared
well
in
microcontrollers
recently
across
many
customers
and
end
markets.
We
like
ST’s
exposure
to
the
secular
tailwinds
around
rising
chip
content
per
vehicle.
We
also
think
the
market
is
generally
too
concerned
about
the
excess
supply
of
SiC
semis
coming
online
in
the
years
ahead,
as
well
as
the
likely
expansion
of
Chinese
semiconductor
competitors.
Both
trends
bear
watching,
but
we
think
ST
has
been
overly
punished
to
date.”

MediaTek

• Fair
Value
Estimate:
1,400.00
Taiwan
dollars
• Morningstar
Rating: ★★★★
• Morningstar Economic
Moat
Rating:
Narrow
• Morningstar Uncertainty
Rating:
High
• Forward
Dividend
Yield:
8.42%

“MediaTek
trades
at
a
discount
to
our
fair
value
estimate
and
offers
a
compelling
forward
yield.
We
think
short-term
worries
about
MediaTek
ceding
smartphone
chipset
market
share
to
Qualcomm
provide
ample
entry
opportunity,
as
it
still
has
plenty
of
headroom
to
expand
its
product
portfolio
on
midrange
to
high-end
5G
smartphones.
We
expect
the
company
can
achieve
its
midteens
revenue
three-year
compound
annual
growth
rate
target
and
probably
extend
the
streak
to
five
years,
as
it
is
rapidly
diversifying
into
ARM-based
PCs,
enterprise
computing
systems,
and
automotive
infotainment
systems.
Autonomous
driving
and
augmented
reality
devices
are
key
growth
drivers
beyond
the
next
three
years,
in
our
view.”

Skyworks
Solutions

• Fair
Value
Estimate:
$133.00
• Morningstar
Rating: ★★★★
• Morningstar Economic
Moat
Rating:
Narrow
• Morningstar Uncertainty
Rating:
High
• Forward
Dividend
Yield:
2.65%

“We
believe
that
Skyworks
Solutions’
radio
frequency
(RF)
products
have
enabled
the
world’s
adoption
of
4G,
and
increasingly
now
5G,
mobile
devices,
the
paramount
being
Apple’s
iPhone
series.
There
have
been
recent
concerns
that
Apple’s
focus
on
expanding
its
internal
chip
capabilities
will
diminish
its
reliance
on
Skyworks.
However,
we
view
that
assessment
as
vastly
overstated
as
Skyworks’
products
use
different
materials
and
have
significantly
different
design
expertise
than
Apple’s
internal
semiconductors.
We
believe
Skyworks
will
achieve
mid-to-high-single-digit
long-term
revenue
growth
as
its
RF
parts
will
remain
essential
as
more
5G
phones
enter
the
market.”

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