Ante Up With These 4 Semiconductor Stocks

Semiconductor stocks have been out-of-favor among individual investors, while some investment firms have pulled their chips off the table and downgraded stocks in the sector. With the caveat that the chip sector is particularly volatile, several long-term growth experts, and contributors to MoneyShow.com, see opportunities in the space for those willing to go against the negative consensus.

Cody Willard, Trading with Cody

What if I told you I was buying a revolutionary tech company’s stock, one of two or three of the best companies in the world’s most important technology industry.

It’s a company that is probably about to take market share for the first time in at least half a decade in an industry that is facing a potential decade-long supply constraint problem that this company could fix giving it a potential trillion-dollar side business along with yet another side business that is one of two or three leading companies solving another trillion-dollar side business. Did I mention that it’s trading at a 12 P/E with a 3% dividend?

The stock is Intel (INTC). Let’s unwind all of that as I mention that most investors think that Intel’s boring. I agreed until recently. Look, INTC has been dead money for years. In fact, did you know that INTC is still way below its year 2000 bubble peak when its closing price was $74.88 on August 31, 2000.

Intel’s boring old CPU semiconductor business has been losing market share; the company had pretty much become an IBM-like or GE-like financial engineering firm with a declining annuity business with boring CEOs and no risk-taking.

Meanwhile, near-term, all indications are that the company’s latest chipset, the Alder Lake is actually cheaper and better than the competition and that’s the kind of thing that can change gross margins, growth rates and eventually P/E multiples.

There’s also the Sapphire Rapids chipset that is the fourth generation of Intel’s Xeon Scalable Processor brand data center server CPU. According to Intel it “will offer the largest leap in data center CPU capabilities for a decade or more.” If it happens to take any market share, that would also reverse years of marketshare loss in Intel’s other major existing business.

INTC’s stock would likely double if the company takes any meaningful share in those two businesses and would likely be up at least a bit from these current high $40s levels if the company takes market share in just the laptop/desktop business.

One of the reasons I like the risk/reward of this trade so much is that I think the downside here is probably limited to about 20% or so, as I think it is quite unlikely that we’d ever walk in one day and see INTC down 50% (it could happen though) while you have pretty good odds that the stock could double on marketshare gains.

And most importantly, it’s the virtual call option on the fab business, making chips for other companies, that makes Intel so compelling here. See, Taiwan Semiconductor and Samsung and Intel will be trying to make new semiconductor chip factories to try to meet the huge demand for new chips in everything in the physical world, from cars and computers and phones to shirts and wearables.

The semiconductor industry just crossed a half trillion dollars in annual sales for the first last year and that number will continue to be a mostly secular growth story for the next decade or two.

Intel’s got the US government and state governments kicking in a big portion of money to help them pay for what will probably end up being close to $100 billion invested in new fabs over the next five years. Those fabs could create a trillion dollar valuation if Intel pulls this off and the demand for semiconductor chips remains as growth-y as it probably will.

Intel’s finally got some real, actually pretty amazing potential catalysts along with the potential to take market share for the first time in years even as the market hates it. The Intel investment set up here does remind me a bit of when I was pounding the table to buy Tesla (TSLA) back at a split-adjusted $45 a share in 2019 because like Intel now, Tesla was hated and doubted by investors and analysts.

With Intel, my calculus is that if company doesn’t take any market share and/or loses market share, the stock will stay around these levels or drop closer to $40. Meanwhile, the potential upside for INTC could be 500%-1000% over the next ten years if the company pulls off taking market share plus some sort of winning business in self-driving and especially if the fab business works out.

This Intel investment, like any, has its risks. But the potential and likeliness of the upside makes this the first time since Tesla in 2019 that you’re seeing me pound the table on a new idea.

Nothing’s easy out there and Intel’s got a lot of work ahead of itself to pull some of this potential off so I’ll remain balanced even as I have made INTC a top 3 largest position in my personal account and in our hedge fund and I plan to buy more on any weakness in both places. Be careful, as always.

Rich Moroney, Dow Theory Forecasts

Despite the stock’s two-month sell-off, operations at Qualcomm (QCOM) appear to have grown stronger. The company reported upbeat December-quarter results — earnings per share and revenue grew at least 30% for the sixth consecutive quarter. It issued guidance for the next two quarters that easily surpassed analyst expectations. And it continues to earn high marks in Quadrix, scoring in the top 15% of our research universe for Momentum, Quality, And Earnings Estimates.

Qualcomm primarily develops semiconductors and systems software that connect to wireless networks (81% of sales for the 12 months ended December and 61% of operating profit). Qualcomm also licenses its patents to other companies (18%, 33%) and has a small strategic-investments segment (less than 1%, 6%).

Qualcomm is seeing strength across its end markets, including mobile devices, automotive, and the catch-all internet of things. Management expects its addressable markets to grow seven times over in the coming decade, reaching $700 billion. Notably, Qualcomm aims to push further into the automobile market while lowering its presence in smartphones.

In the past year, Qualcomm has announced several deals to pro- vide driver-assistance technology to automakers, such as General Motors (GM) and BMW. Management says revenue from automakers should reach $10 billion in 10 years, up from its current $1 billion.

Moreover, Qualcomm expects semiconductor sales for connected devices (internet of things) to climb more than 75% to $9 billion by fiscal 2024 ending September, suggesting annual growth of 21%. The company has also developed a new semi- conductor for gaming-specific hand-held devices that connect to 5G networks.

With this strategy, Qualcomm will reduce its exposure to Apple (AAPL), which continues to develop more of its own components for iPhones, iPads, and Macs. Apple is forecasted to account for just 4% of Qualcomm’s revenue by 2024, versus more than 10% last year.

Qualcomm remains upbeat on the smartphone industry’s prospects. Management expects semiconductor sales for smartphones to rise at least 12% annually through 2024. The stock trades at 18 times trailing earnings, below the median of 21.5 for semiconductor stocks and its own five-year norm of 28. Qualcomm is rated as a “Long-Term Buy”.

Tony Daltorio, Market Mavens

Taiwan Semiconductor (TSM) is my favorite semiconductor company; it is the world’s largest contract manufacturer. In January, the firm said that it will spend a record amount in 2022 — as much as $44 billion — to expand capacity as the company tries to help alleviate the global chip shortage and meet surging demand for advanced chips used in AI and 5G-driven applications for cars, data centers, and smartphones.

The company, which supplies chips to almost all the world’s leading chip developers, has earmarked between $40 billion and $44 billion for capital expenditure this year—a major step up from its already record-breaking $30 billion in spending in 2021. This puts TSM on track to meet its target of investing $100 billion over the three years ending in 2023.

The firm’s CEO, C.C. Wei, has said the overall foundry industry will grow 20% on the year in revenues. But that’s not good enough for Taiwan Semiconductor. Wei added that TSM will outperform that rate with growth in the mid- to high-20% range. He also raised the forecast for the company’s compound annual growth rate (CAGR) for “the next several years,” to between 15% and 20% in U.S. dollar terms, higher than the previous forecast of about 10%.

And despite these massive spending plans, Wei assured TSM investors that a 53% gross margin rate for several years to come is achievable, and that the company can earn a sustainable return on investments of more than 25%.

He’s likely to be proven right. The company told clients last August that it will hike prices by up to 20% for its various manufacturing services. TSM’s biggest price adjustment in a decade started to have an impact in the last quarter of 2021, and will no doubt boost the company’s profit margin in 2022.

Taiwan Semiconductor’s revenue for all 2022 will likely rise by about 25%, as forecast, as the price increases helps lift its average selling price, and as the company gains more orders from Nvidia and Qualcomm this year, at Samsung’s expense. TSM stock is a buy on any selloff in tech stocks.

Ben Reynolds, Sure Dividend

Skyworks Solutions (SWKS) is a leading semiconductor company that designs, develops, and markets proprietary semiconductor products that are used around the world. The company’s portfolio of products includes amplifiers, antenna tuners, converters, modulators, receivers, and switches.

Skyworks’ products are used in a variety of industries, including automotive, connected home, defense, industrial, medical, and smartphones. The current version of the company is the result of a completed merger almost 20 years ago. The company has a market capitalization of $23 billion.

Skyworks announced Q1 fiscal year 2022 results on February 3, 2022. Revenue of $1.51 billion was flat compared to the prior year, but $10 million higher than analysts had expected. Adjusted earnings- per-share of $3.14 was a decline of $0.22, or 6.5%, from the prior year, but was $0.03 better than expected.

The company also provided an outlook for the second quarter of the fiscal year. Skyworks expects revenue and earnings-per-share to grow at double-digit rates compared to the prior year.

Skyworks has a portfolio of advanced products that help give the company some advantages over its peers in the area of wireless technology. The company has also been a beneficiary of the growing relevance of the smartphone in the lives of consumers. That said, Skyworks is largely reliant on this market for its business. It is also highly dependent on Apple (AAPL) for as much as half of its annual revenue.

The market for smartphones is becoming saturated, leading Skyworks to look for additional avenues of growth, including the areas of automobile connectivity and smart homes. Skyworks’ performance during the Great Recession was solid as the company produced earnings-per-share of $0.36, $0.72, $0.55, $0.75, and $1.19 for the 2007 to 2011 period.

Skyworks has increased its earnings-per-share at a rate of nearly 21% over the last decade, driven primarily by the proliferation of smartphones. We expect that Skyworks will grow earnings-per-share by 10% per year over the next five years, a lower rate than the historical average due to smartphone saturation, but what we feel is reflective of the quality of the firm.

The stock is trading at 11.9 times our earnings-per-share estimate of $11.55 for fiscal year 2022. Our five-year target price-to-earnings ratio is 15, implying a potential 4.8% annual contribution from multiple expansion over this period. Altogether, our expected earnings growth rate of 10%, yield of 1.6%, and a mid-single-digit contribution from multiple expansion results in a projected annual return of 16.5% for the five years.