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3 Chip Stocks Perfect For Long-Term Investors

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·6 min read
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Semiconductors, commonly referred to as microchips, enable everything we use on a daily basis to work correctly and have quickly become a foundation of the modern world as we know it. Typically around the size of a small coin, we find microchips within our mobile devices, vehicles, computers, and even freezers – to give just a few examples.

During the initial phases of the pandemic whenever COVID-19 took the world by storm, microchip-enabled technologies were a bright spot in an otherwise dark world. Chips allowed us to work, study, and communicate from the comfort of our homes while the outside world was off-limits.

As a result, semiconductor stocks soared to new heights and seemingly felt unstoppable. Investors were thrilled, reaping a multitude of gains along the way.

Now, in 2022, the music has been shut off.

Year-to-date, we’ve witnessed deep valuation slashes across the board for many semiconductor stocks – and most have been by double-digit percentages.

An unanticipated level of demand for microchips has sent the supply chain entirely out of equilibrium and caused lead times to skyrocket. Mixing this supply chain issue into a volatile market environment overshadowed by a hawkish Fed and surging energy costs has no doubt added fuel to the fire sale.

Three companies operating within the semiconductor realm include Advanced Micro Devices AMD, ON Semiconductor Corp. ON, and Taiwan Semiconductor Manufacturing Company TSM. Below is a chart that illustrates the year-to-date performance of all three companies while blending in the S&P 500 as well.

Zacks Investment Research
Zacks Investment Research


Image Source: Zacks Investment Research

As we can see, all companies are deep in the red for the year and have underperformed the S&P 500.

Well off their highs, it brings about a unique and rare opportunity to buy shares at levels not seen in some time. Let’s get into why these three chip stocks would be great bets for long-term growth and share appreciation.

ON Semiconductor Corp.

ON Semiconductor’s ON valuation metrics sit at levels not seen in some time, marking a rare opportunity to buy shares at much more reasonable levels.

The company has seen its forward earnings multiple retrace down to 12.4X, nowhere near 2020 highs of 42.6X and well below its median of 14.3X over the last five years. In addition, the value represents an attractive 33% discount relative to the S&P 500’s forward P/E ratio of 18.5X.

Zacks Investment Research
Zacks Investment Research


Image Source: Zacks Investment Research

The company has been on a hot earnings streak, chaining together eight consecutive EPS beats. Over its last four quarters, the company has an average EPS surprise in the double-digits of 20%, and in its latest quarter, ON exceeded earnings estimates by a sizable 16%. The strong quarterly performances bode well for the company’s current health.

In addition to robust quarterly results, analysts have rapidly upped their earnings outlook across the board over the last 60 days. The Consensus Estimate Trend has climbed a mighty 21% for the upcoming quarter, reflecting EPS of $1.26 and a sizable 100% growth in earnings from the year-ago quarter.

Furthermore, for FY22, the $4.91 per share earnings estimate displays a mighty 67% expansion of the bottom-line year-over-year.

Zacks Investment Research
Zacks Investment Research


Image Source: Zacks Investment Research

ON Semiconductor is a Zacks Rank #1 (Strong Buy).

Advanced Micro Devices

Advanced Micro Devices AMD has seen its forward earnings multiple slide all the way down to levels we haven’t seen in years.

AMD’s forward P/E ratio currently resides at 25.6X, a fraction of its high of 107.2X and marginally higher than its low of 21.6X over the last five years. The value represents a 39% premium relative to the S&P 500’s value; however, the current value is much more reasonable compared to levels where shares have traded previously.

AMD has chained together nine consecutive EPS beats. Over its last four quarters, the average EPS surprise has been a solid 19%, and in its latest quarter, the company exceeded bottom-line estimates by a substantial 24%.

Over the last 60 days, analysts have been positively revising their bottom-line estimates across all timeframes. For the upcoming quarter, the $1.02 per share earnings estimate reflects a very sizable 61% growth in earnings from the year-ago quarter.

Additionally, for FY22, earnings are forecasted to be $4.34 per share, which reflects a substantial expansion in the bottom-line of a double-digit 55%.

Zacks Investment Research
Zacks Investment Research


Image Source: Zacks Investment Research

AMD is a Zacks Rank #3 (Hold).

Taiwan Semiconductor Manufacturing Company

Taiwan Semiconductor Manufacturing TSM shares have struggled throughout 2022, bringing the company into buyers’ spotlight.

TSM’s forward earnings multiple now sits at 16.1X, nicely below its median value of 19.9X over the last five years and nowhere near 2021 highs of 34.9X. Additionally, the chip giant’s value represents an attractive 13% discount relative to the S&P 500’s levels.

Zacks Investment Research
Zacks Investment Research


Image Source: Zacks Investment Research

In addition to attractive valuation levels, TSM has performed very well, exceeding EPS estimates in six straight quarters. Over its past four quarters, the company has an average EPS surprise of 4.2%, and in its latest quarter, the company beat EPS estimates by a respectable 7%.

Earnings outlook has been raised across the board over the last 60 days, with the upcoming quarterly EPS estimate sitting at $1.48 – a notable 60% expansion in the bottom-line from the year-ago quarter.

The full current year EPS estimate resides at $5.93, which would pencil in a robust 44% growth in earnings year-over-year.

TSM is a Zacks Rank #3 (Hold).

Bottom Line

It’s undoubtedly been a rough year for investors who have held positions in microchip stocks. However, not all is negative – we’ve been presented with a rich buying opportunity at levels not seen in years.

Additionally, semiconductors are here to stay, and we will only need more of these essential items moving forward as we march towards the digital age.

All three companies would be excellent bets for long-term investors seeking to reap considerable gains and gain exposure to an industry expected to be here for the foreseeable future.


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Advanced Micro Devices, Inc. (AMD) : Free Stock Analysis Report
 
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