Surprising Bargains Available in This Semiconductor ETF

The artificial intelligence-fueled run-up by Nvidia (NVDA) and accelerating demand for the fabrication and foundry services provided by Taiwan Semiconductor (TSM) are among the reasons the semiconductor space is currently viewed as richly valued.

That’s not necessarily cause for concern at a time when growth stocks are in favor. But there are some avenues for bargain-hunting investors seeking semiconductor exposure to consider. Take the case of the VanEck Semiconductor ETF (SMH). That $12.80 billion fund allocates over 31% of its weight to Nvidia and Taiwan Semiconductor. But the fund is also home to some chip stocks that analysts view as favorably valued. That’s relevant because good deals are hard to come by in the space.

At the same time, the big rally in semiconductor stocks in 2023 removed many of the bargains from the space. Overall, these stocks are 4% undervalued, compared with 15% a quarter ago. Still, Morningstar analysts see opportunities for long-term investors, especially among analog and mixed-signal chip companies,” noted the research firm’s Diana Anghel.

A Pair of Favorably Valued SMH Holdings

SMH, which follows the MVIS US Listed Semiconductor 25 Index, is home to 25 stocks, some of which are sporting compelling valuations. One of those names is radio frequency chip giant Skyworks Solutions (SWKS), which counts Apple (AAPL) as one its marquee customers.

“Skyworks believes it has a strong relationship with the handset titan and can gain further radio frequency dollars per iPhone if it can build best-of-breed solutions with improved performance or tighter integration. We agree with this viewpoint, as Apple should continue to buy premium components from all vendors if it gives iPhone users the ability to receive more data, longer battery life, or an elegant user experience,” noted Morningstar’s Brian Colello.

STMicroelectronics (STM), which has exposure to analog, microcontrollers, digital processors, and power semiconductors, offers investors the benefit of product portfolio breadth as well as compelling valuations relative to the broader chip universe.

“We think STMicro has a nice lineup of processors and microcontrollers across a wide range of applications and price points, although such a lineup isn’t wholly unique among its peers. Still, these types of demos give us confidence that microcontrollers will continue to gain adoption in a variety of innovative applications in the car for years to come,” concluded Colello.

SMH is up 7.05% year to date.

For more news, information, and analysis, visit the Beyond Basic Beta Channel.