Technology stocks are rarely inexpensive, and that sentiment also applies to the semiconductor industry, but a recent pullback in the group has some chip stocks trading at attractive multiples.
That could prove to be good news for investors considering exchange traded funds like the Invesco PHLX Semiconductor ETF (SOXQ). SOXQ, which debuted last June, tracks the PHLX SOX Semiconductor Sector Index, which is one of the most venerable gauges of chip stocks.
SOXQ is home to 30 stocks, several of which are being highlighted by analysts as now sporting compelling multiples. That includes Taiwan Semiconductor (NYSE:TSM), which operates one of the world’s largest semiconductor foundries.
“Taiwan Semiconductor is the world’s largest chip manufacturer, with companies like Apple, AMD, and Nvidia among their clients. Analyst Phelix Lee recently raised the company’s fair value estimate to $179 per share, leaving it at a 32% discount,” notes Morningstar analyst Jakir Hossain. “The company was recently contracted to produce new chips for MediaTek’s entry into the premium chipset market. Lee also sees two long-term growth catalysts for TSM.”
Advanced Micro Devices (NASDAQ:AMD) and Nvidia (NASDAQ:NVDA) combine for more than 13% of SOXQ’s weight. Taiwan Semiconductor accounts for 4.64% of the ETF’s roster. Adding to the allure of the chip foundry operator is the fact that it’s expanding capacity in significant fashion with the aim of helping reduce the global chip shortage.
Lam Research (NASDAQ:LRCX), another SOXQ holding, also scores well based on current valuation metrics.
“Lam Research specializes in producing equipment used to manufacture semiconductors. Supply chain constraints cut into the company’s fourth quarter profits, according to management. While sales were up 22% year-over-year, they were down 2% from the previous quarter. The company’s management and Morningstar tech strategist Abhinav Davuluri expect demand for equipment in 2022 to remain robust,” says Hossain.
The Morningstar analyst also highlights opportunity with Teradyne (NYSE:TER), which makes automated testing equipment for semiconductor companies.
Teradyne “management also announced that sales would be down in 2022 due to a delay at TSM for it’s 3-nanometer node. As a result, investors have sent shares sliding 30.2% since the beginning of the year. Despite this, analyst William Kerwin still sees the company as highly attractive, trading at a 34% discount,” concludes Hossain.
Lam Research and Teradyne combine for more than 5% of SOXQ’s weight.
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The opinions and forecasts expressed herein are solely those of Tom Lydon, and may not actually come to pass. Information on this site should not be used or construed as an offer to sell, a solicitation of an offer to buy, or a recommendation for any product.