Due to recent innovations in artificial intelligence and large language models, most semiconductor stocks have rallied. The VanEck Semiconductor ETF (NASDAQ:SMH) is up 45% year-to-date. Meanwhile, Nvidia (NASDAQ:NVDA) is up over 180%. However, many undervalued semiconductor stocks have yet to rally.
The AI tide has not lifted all boats. While beneficiaries like Nvidia and Broadcom (NASDAQ:AVGO) have had enormous rallies, other semi stocks have lagged.
Some underperforming stocks have had idiosyncratic challenges. For instance, Intel (NASDAQ:INTC) is losing market share in the PC and data center market.
Meanwhile, the other factor is a continuing demand slump in end markets. Double ordering and raising inventories to avoid supply issues created a supply glut.
Then, demand in some end markets like smartphones and tablets peaked. Unfortunately, the elevated inventory issues that surfaced in 2022 haven’t subsided. Chip inventories are hitting record levels underscoring the weak demand.
Because of the demand slump and elevated inventories, select semi-companies in memory, industrial and smartphone end markets are experiencing lower sales. These stocks are yet to recover their steep drawdowns in 2022.
However, as demand rebounds from a cyclical bottom, expect these undervalued semiconductor stocks to recover.
Microchip Technology (MCHP)
Microchip Technology (NASDAQ:MCHP) is an Arizona-based chip maker that produces and sells smart, connected and secure embedded control solutions for various applications.
In fiscal year 2023, industrial, data center & computing and automotive made up 41%, 19% and 17% of revenues, respectively.
Although Microchip has had a decent 16% YTD rally, it’s still undervalued. For fiscal year 2023, ending March 31, the company grew EPS 30.6% year-over-year (YOY) to $6.02.
The stock trades at 13.6 times trailing earnings. Clearly, the market is not crediting one of the best semiconductor companies for its 130 consecutive quarters of non-GAAP profitability.
What makes MCHP stock one of the top semiconductor stocks to buy are its prospects going forward. It has positioned its product portfolio to benefit from 5G, the Internet of Things, data centers, electric vehicles, advanced driver assist systems and sustainability mega-trends.
For instance, their Bernstein Conference presentation highlighted 88 Microchip products used in the HKMC IONIQ 6 electric sedan.
Over the next five years, management forecasts a 10%-15% organic revenue compounded-annual-growth rate. They expect to convert more than 38% of revenue into free cash flow and return 50% of adjusted FCF to shareholders.
Considering the forward P/E is 13 and shareholder returns will increase going forward, MCHP stock is a bargain. Analysts agree it is one of the undervalued semiconductor stocks. They have an average price target of $90, representing a 10% upside.
Skyworks Solutions (SWKS)
Skyworks Solutions (NASDAQ:SWKS) is a chip maker that focuses on wireless communication applications.
Its specialty is radio frequency semiconductors used in mobile devices like smartphones. Because of its leadership in RF, it counts Apple (NASDAQ:AAPL) as one of its largest customers.
In today’s world, everything from the home, house appliances and vehicles have cellular connectivity. According to Statista, a typical U.S. household has over ten wirelessly connected devices.
This trend is increasing the addressable market for Skyworks. Besides, the company is venturing into new markets. For instance, the company is winning contracts to supply onboard charging and digital radio connectivity solutions to EV manufacturers.
In terms of its traditional market, 5G adoption is a massive growth opportunity for the stock. The technology improves data rates and expands network capacity, supporting new applications. Also, the company is penetrating the IoT market through several design wins.
Over the last year, Skyworks has experienced revenue declines because of the contraction of the global smartphone market. Notably, revenues have declined for two consecutive quarters highlighting the sustained weakness in end markets.
Looking ahead to the next quarter, demand is yet to hit a trough. Management expects sales between $1.050 billion and $1.090 billion, a decline from last year’s $1.2 billion.
Skyworks’ revenues have always been dependent on Apple’s product cycles. In the aggregate, Apple accounted for 59% and 58% of revenues in FY2021 and FY2022, respectively.
The company could benefit from a new iPhone cycle. Also, if Apple includes its chips in the Vision Pro, the company will see incremental revenue growth.
Buying SWKS stock here as a play on a new Apple product cycle or the eventual recovery in the smartphone market. The stock is trading at a cheap forward P/E of 11. And you are paid to wait for the recovery, with a healthy 2.4% dividend yield.
NXP Semiconductors N.V. (NXPI)
Although NXP Semiconductors N.V. (NXPI) is up 20% YTD, it is still a bargain relative to peers.
Because of the discount, it makes the undervalued semiconductor stocks list. Besides valuation, it’s also one of the best-positioned semiconductor companies.
In terms of its portfolio mix, NXP generates 51% of its revenues from electric vehicles (EV) and ADAS. The company has established partnerships with global OEMs.
As a result, growth in its automotive segment is outpacing other segments. For instance, in FY2022, automotive YOY growth was 25.2%. Meanwhile, growth in industrial and mobile was 11.7% and 8.5%, respectively.
As EV adoption increases, the Netherlands-based company will be a huge beneficiary. Moreover, its ADAS business will also see increased demand. Since the automotive segment represents over half of revenues and is growing faster, revenues will become less cyclical.
In the medium term, the weakness in its industrial and mobile segments has been weighing down the stock. As Q1 2023 results showed, revenue declined -26% and -35%, respectively.
In contrast, automotive delivered an outstanding performance, with revenues growing 17%.
“NXP is successfully navigating through the cyclical downturn in our consumer-exposed businesses, while we see continued strength in our automotive and core-industrial businesses,” said CEO Kurt Sievers.
At a forward P/E of 13, NXPI is among the best semiconductor stocks to buy. It is a secular long term bet on EV adoption and the rise in autonomous driving. And in the meantime, you earn a 2% dividend.
On the date of publication, Charles Munyi did not have (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.