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3 Chip Stocks Worth a Bet for Long-Term Gains

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When COVID-19 initially took the world by storm, semiconductor-enabled technologies played a crucial role in allowing us to work, study, and communicate from the comfort of our homes while the outside world was shut down.

As a result, semiconductor stocks soared to new heights, allowing investors to reap a multitude of gains along the way.

Semiconductors, often called microchips, enable devices we use daily to work efficiently and correctly. Around the size of a small coin, we find microchips within mobile devices, vehicles, computers, and even freezers.

Simply put, chips have become a foundation of the modern world.

Throughout 2022, these high-flying semiconductor stocks have retraced in value extensively, primarily by double-digit percentages. A volatile market overshadowed by a hawkish Fed has undoubtedly been a driving force behind the poor share performance.

Three companies operating within the semiconductor realm – Analog Devices ADI, ON Semiconductor ON, and Taiwan Semiconductor TSM – have seen their shares pull back significantly throughout 2022. The chart below illustrates the year-to-date performance of all three companies while blending in the S&P 500 as a benchmark.

Zacks Investment Research
Zacks Investment Research


Image Source: Zacks Investment Research

As we can see, it’s been a rough stretch for all three companies, although it’s also been the theme for the general market.

Well below their highs, we’ve been presented with a rare opportunity to buy shares of these companies at levels not seen in quite some time. Let’s get into why these three stocks would be great bets for share appreciation and long-term growth.

Taiwan Semiconductor

Taiwan Semiconductor TSM is the world's largest dedicated integrated circuit foundry. The company is currently a Zacks Rank #3 (Hold) with an overall VGM Score of an A.

Valuation levels have been taken down a level; its current forward earnings multiple of 14.3X is nowhere near 2021 highs of 34.9X and well below its five-year median of 19.9X. Furthermore, the value represents a notable 13% discount relative to the S&P 500’s forward P/E ratio of 16.4X.

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Zacks Investment Research


Image Source: Zacks Investment Research

Bottom-line growth appears robust as well. For the upcoming quarter, the Zacks Consensus EPS Estimate resides at $1.48, reflecting a strong 60% growth in earnings from the year-ago quarter.

The bottom line is forecasted to expand by a substantial 44% in FY22, and in FY23, earnings are expected to grow by an additional 5.6%.

TSM enjoys rewarding its shareholders via its 1.7% dividend yield with a payout ratio sitting sustainably at 33% of earnings. Additionally, the company has increased its dividend a whopping nine times over the past five years, with a five-year annualized dividend growth rate of 13.5%. The annual yield is marginally higher than the S&P 500’s yield.

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Zacks Investment Research


Image Source: Zacks Investment Research

Analog Devices

Analog Devices ADI is an original equipment manufacturer of semiconductor devices, specifically analog, mixed-signal, and digital signal processing integrated circuits. The company currently carries the highly-coveted Zacks Rank #1 (Strong Buy).

ADI’s forward earnings multiple has come down to 15.6X, nearly half of its 29.2X high in 2020 and well below its five-year median of 21.1X. Furthermore, it represents an enticing 5% discount relative to the S&P 500’s value.

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Zacks Investment Research


Image Source: Zacks Investment Research

The bottom line is forecasted to expand significantly in the upcoming quarter, with the $2.42 per share quarterly estimate displaying a massive 40% growth in earnings from the year-ago quarter.

Looking forward, the bottom line is forecasted to expand by a substantial 43% in FY22 and an additional 9% in FY23.

For investors with an appetite for income, ADI has that covered with its 2.1% annual dividend yield with a payout ratio sitting sustainably at 39% of earnings. Undoubtedly to the likes of investors, the company has increased its dividend payout five times over the past five years, with an 11.3% five-year annualized dividend growth rate.

The annual yield is much higher than that of the S&P 500.

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Zacks Investment Research


Image Source: Zacks Investment Research

ON Semiconductor

ON Semiconductor ON is an equipment manufacturer of a broad range of discrete & embedded semiconductor components. The company sports a Zacks Rank #2 (Buy) with an overall VGM Score of an A.

ON boasts an enticingly low 10.7X forward earnings multiple, an absolute fraction of 2020 highs of 42.6X and nicely below its five-year median of 14.3X. Additionally, shares trade at a staggering 35% discount relative to the S&P 500.

Zacks Investment Research
Zacks Investment Research


Image Source: Zacks Investment Research

Analysts have been upping their earnings outlook across the board over the last 60 days with a 100% revision agreement percentage – undoubtedly a bullish signal. For the upcoming quarter, the $1.26 per share earnings estimate reflects a massive triple-digit growth in earnings of 100% from the year-ago quarter.

For FY22, the bottom line is expected to expand by a stellar 66%, and in FY23, earnings are forecasted to grow an additional 0.5%.

ON has consistently reported strong quarterly results, exceeding bottom line expectations in eight consecutive quarters dating back to June 2020. Over its last four quarters, the company has beat EPS estimates by 20%, on average.

Bottom Line

It’s been a rough stretch in the market throughout 2022 for all three companies. Through all of the gloom and doom, there are still positives – shares trade at much more reasonable valuation levels, and earnings are still forecasted to grow substantially.

All three companies would be great places to start for investors seeking exposure to the rapidly growing semiconductor realm.

Let’s face it – microchips aren’t going anywhere for the foreseeable future.


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