Some semiconductor stocks are rallying in the first two months of 2023. Others, such as Intel (NASDAQ: INTC), continue frustrating investors. With this in mind, selectivity is important with chip stocks in the current environment.
However, that doesn’t diminish the case for exchange traded funds such as the VanEck Semiconductor ETF (SMH). SMH, which follows the MVIS US Listed Semiconductor 25 Index, is higher by 17.38% this year, indicating there’s value in eschewing stock picking in the semiconductor space. SMH is also outperforming broader technology benchmarks, as highlighted by its 2023 advantage of 800 basis points over the S&P 500 Information Technology Index.
Speaking of value, there’s plenty to be had among semiconductor equities, which further enhances the allure of SMH, as the ETF provides exposure to multiple names with value traits. Advanced Micro Devices (NASDAQ: AMD), SMH’s third-largest component at a weight of 5.03%, is an example of an undervalued chip stock.
“Advanced Micro Devices designs an array of chips for various computing applications. These products include central processing units and graphics processing units tailored to PCs, game consoles, and servers. AMD operates in the x86-based duopoly with Intel that dominates the PC and server CPU markets. We think AMD benefits from intangible assets related to its x86 instruction set architecture license and chip design expertise, which gives us confidence that the firm will generate excess returns over its cost of capital over the next decade and thus warrants a narrow economic moat rating,” noted Morningstar strategist Abhinav Davuluri.
Marvell Technology Group (NASDAQ: MRVL), which accounts for 2.75% of the SMH roster, is another example of an undervalued semiconductor name. Alone, the low valuation is compelling, but it’s even more notable when considering the company’s exposure to the high-growth the cloud, 5G, and automotive markets.
“The new-look Marvell offers strong growth potential, impressive profitability, and a healthy competitive position. Between switching, network processing, and optical chips, Marvell has one of the broadest networking silicon portfolios in the world, and we believe it is primed to grow faster than its underlying markets as future networking setups utilize greater content and we anticipate Marvell will continue to win sockets over competitors,” said Morningstar analyst William Kerwin.
While Intel, 4% of SMH’s weight, may look like a value trap at the moment, that’s not the case with Nxp Semiconductors (NASDAQ: NXPI) and Skyworks Solutions (NASDAQ: SWKS). Those two stocks, which combine for over 5% of SMH, are also viewed as undervalued.
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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.
