Surprising Discounts Available Among Chip Stocks

With Nvidia (NASDAQ: NVDA) up a staggering 169.10% year-to-date and the stock’s recent (if fleeting) entry into the $1 trillion market capitalization club, it would be reasonable to assume that semiconductor chip stocks are overvalued.

It’s a common refrain regarding Nvidia and Broadcom (NASDAQ: AVGO), owing to the latter’s own scorching hot 2023 run. However, chip equities have some compelling valuations. Several of the attractively valued names reside in related exchange traded funds, including the VanEck Semiconductor ETF (SMH).

SMH, which follows the MVIS US Listed Semiconductor 25 Index, is up 44% year-to-date, confirming that the ETF is benefiting from Nvidia being its largest holding at a weight of 17.58%. Still, some of the ETF’s 26 holdings appear on Morningstar’s recently released list of undervalued chip stocks.

Two smaller SMH member firms — Microchip Technology (NASDAQ: MCHP) and Skyworks Solutions (NASDAQ: SWKS) — fit the bill as undervalued. Those two stocks combine for about 3.3% of the ETF’s roster.

“The most undervalued company on the list is Skyworks Solutions, trading at a 32% discount to the fair value estimate set by Morningstar analysts. The least undervalued on the list is Microchip Technology, trading at a 13% discount,” noted Morningstar analyst Maggie Guidici.

More Chip Stock Bargains Abound in SMH

Some of SMH’s more prominent names are also in undervalued territory. That group includes Dow component Intel (NASDAQ: INTC) and Qualcomm (NASDAQ: QCOM), which combine for 8.54% of the VanEck ETF’s portfolio.

“Qualcomm’s high-end Snapdragon application processors, which often integrate baseband chip functionality, are commonplace in high-end Android smartphones, though OEMs like Samsung have sought to replicate Apple’s strategy of developing in-house chips,” added Brian Colello, Morningstar director of tech equity research. “Despite these threats, Qualcomm has retained technological superiority over many rivals, and we think there’s a good chance this will continue in the decade ahead, especially as more and more phones rely on advanced 5G connectivity.”

Another undervalued stock is NXP Semiconductors (NASDAQ: NXPI), which accounts for 2.54% of SMH. That could be worth acknowledging because the company is one of the dominant providers of chips to the automotive industry. On that note, NXP could have a compelling runway for long-term growth due to the chip-intensive nature of electric vehicles.

“NXP is among the market leaders in automotive semis, especially in microcontrollers, that serve as the brains of a variety of electronic functions in a car. We’re optimistic about NXP’s development of products used in active safety systems, such as 77-gigahertz radar modules and battery management systems in upcoming electric vehicles,” concluded Colello.

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