Stocks to buy

2023 is an interesting time to be looking for undervalued semiconductor stocks. Valuations have come down for some firms, but that comes amid a major downturn in the earnings outlook for many of the industry’s leading companies.

Indeed, a high-level semiconductor industry analysis in 2023 might seem grim. The chip shortage of 2021 and early 2022 has turned into a massive glut. Sub-categories such as memory and graphics chips are showing harrowing declines in demand. Companies like Advanced Micro Devices (NASDAQ:AMD) are posting disappointing earnings. There are legitimate reasons for concern.

The good news, however, is that not all parts of the industry are reacting similarly. We’ve seen some pockets, such as analog chips, that are still showing robust demand pictures. Meanwhile, other semiconductor stocks have already sold off sharply enough to make them strong buys today even with the challenging industry backdrop. All this adds up to these three companies being undervalued semiconductor stocks which have the potential to still perform.

Texas Instruments (TXN)

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Texas Instruments (NASDAQ:TXN) is the leader in analog semiconductor chips; it has an overwhelming market share advantage in the category.

Analog chips are unique in that they recognize gradations of data rather than simply being a chip that is on or off, a 1 or a 0 so to speak. This nuance allows analog chips to serve a wide variety of functions in observing and processing real world data, and making it useful to computing systems.

Analog chips are riding a huge multi-decade secular growth story as we make more and more smart devices. A self-driving car, for example, needs heaps of information and sensing about the world around it to operate safely. The IoT is another huge driver for analog chips as a whole legion of smart fridges, security cameras, watches and so on interact with the broader world.

Texas Instruments also has a tremendously shareholder-friendly operation. Management focuses all decisions around increasing free cash flow per share, and it subsequently returns that cash to shareholders via dividends and buybacks. TXN stock has delivered tremendous results over the past decade, and there’s little reason to doubt that it can use any brief downturn in the chips industry to further strengthen its position.

Taiwan Semiconductor Manufacturing Company (TSMC)

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People might think of AMD or Nvidia (NASDAQ:NVDA) as the most attractive long-term play on semiconductors. And they certainly are good businesses, albeit highly valued ones. However, for the futuristic growth potential of semiconductors, look no further than Taiwan Semiconductor Manufacturing Company (NYSE:TSM).

TSM is the world’s largest chip foundry. It commands an impressive 57% market share in its core market and is an indispensable part of the global electronics supply chain. By making chips for many of the world’s leading semiconductor companies, TSM is guaranteed to be a big part of the global computing future regardless of which specific companies or technologies lead the way.

There’s also a unique value proposition in TSM stock today. That’s because its shares have sold off due to geopolitical concerns around the state of relations between Taiwan and China. However, TSM is aware of the risks and is taking measures, such as building factories in the United States, to mitigate these.

Due to the political risk, TSM stock is now selling at a massive discount to fair value. Morningstar’s Phelix Lee believes TSM stock should be worth $139. Even if the semiconductor industry takes a sharp leg lower, TSM stock is already cheap enough to reflect that risk and still be a bargain.

Amkor Technology (AMKR)

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A final way to sidestep the current downturn in the semiconductor industry is to buy a company that is already pricing in the dip. Amkor Technology (NASDAQ:AMKR) is one such example.

Amkor is a leader in specialized products for the semiconductor space, namely semiconductor packaging and testing services. Semiconductor producers will hire Amkor to test their chips to ensure that they function as expected and then package them for shipment to the end buyer. This is not a glamorous part of the industry supply chain, but it is an integral element in making the electronics industry work as expected.

AMKR stock had rallied to $30 per share in January amid the broader excitement in the semiconductor industry. However, shares are down a quick 30% and now go for just $21, as traders have started to factor in the major downturn in demand.

The thing is that several major industry leaders haven’t seen their share prices fall yet. By contrast AMKR stock is already going at a discount. Shares go for less than 11 times forward earnings. Additionally, analysts expect a more than 20% pop in the firm’s earnings next year, which would put Amkor shares at just 8 times projected 2024 earnings. That’s a bargain no matter how you slice it.

On the date of publication, Ian Bezek held a long position in TXN stock. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.

Ian Bezek has written more than 1,000 articles for InvestorPlace.com and Seeking Alpha. He also worked as a Junior Analyst for Kerrisdale Capital, a $300 million New York City-based hedge fund. You can reach him on Twitter at @irbezek.

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