Qualcomm and 3 Other Chip Stocks to Buy on the Sector’s Surprising Drop

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Even a Wall Street analyst who has been doubtful on chip stocks is surprised at the magnitude of the sector’s decline this year. Piper Sandler analyst Harsh Kumar said Tuesday that the broad-based selloff is now providing attractive buying opportunities.

“We are a bit baffled by the steep declines in semiconductor stocks,” he wrote. “We are moving to a more positive stance on semiconductor stocks following our more cautious approach since the beginning of the year.”

The

iShares Semiconductor ETF

(ticker: SOXX), which tracks the performance of the ICE Semiconductor Index, had declined by 26% through Monday, compared with a 16% drop for the

S&P 500.

The analyst said current valuations for semiconductor stocks already reflect the likelihood that Wall Street will scale back its forecasts for earnings late this year. And he noted that as a group, companies in the sector are trading at a price/earnings ratio that is near the lowest in nearly 10 years relative to the

S&P 500’s
multiple.

Chip companies are likely to perform better as China exits its Covid-19 lockdowns and shortages dissipate in the supply chain for semiconductor manufacturing, he said. “While we also provide other scenarios that show further downside for semiconductor names, we expect this cycle to be more normal than recent shocks to the system,” he wrote.

Still, Kumar said, investors should be prudent about which stocks to purchase. Chip companies exposed to corporate spending will outperform during a recession, he said.

As a result, he reiterated his Overweight ratings for

Qualcomm

(

QCOM

),

Advanced Micro Devices

(

AMD

),

Marvell

(

MRVL

), and

ON Semiconductor

(

ON

) as his top chip-stock ideas in the current environment.

AMD and

Marvell

are thriving as they sell into the resilient enterprise data-center market. Earlier this month, AMD said revenue from its EPYC server-processor business more than doubled during the March quarter.

ON Semiconductor

is also exposed to the automotive and industrial segments, where demand has been better than in other areas.

Qualcomm is a special case. The company, a maker of mobile processors and 5G wireless chips, posted strong earnings last month. While the level of consumer demand does pose a risk to its mobile phone business, Kumar believes the market is underestimating Qualcomm’s success as a supplier of chips for the internet of things and automobiles.

Write to Tae Kim at [email protected]