While stocks have soared for the semiconductor companies at the heart of the artificial intelligence boom, there’s more to this industry than powering chatbots.
Historic demand continues to rise for AI, led by Nvidia’s NVDA data center graphics processing units. But the non-AI landscape—cars, personal electronics, industrial devices, etc.—is different.
“PC and smartphone chip demand is recovering from cyclical bottoms in 2022-23,” says Brian Colello, technology equity strategist for Morningstar. “Industrial chip demand seems to be mired in the bottom of a downturn in the first quarter, although firms are seeing some green shoots that suggest a recovery in the second half of 2024. Automotive chip demand is the biggest question mark heading into first-quarter earnings.”
Against this mixed backdrop, here are our analysts’ top semiconductor stock picks, each of which is undervalued:
- Infineon Technologies IFNNY
- STMicroelectronics STM
- MediaTek TAI:2454
- Skyworks Solutions SWKS
Colello favors Infineon and STMicroelectronics because of their lower valuations.
Semiconductor Stock Valuations
The past year’s rally in semiconductor stocks removed many bargains from the space. A year ago, the median digital and analog semis stock under Morningstar’s coverage was 13% undervalued on a price/fair value basis. Today the industry is 1% overvalued.
However, it’s not a uniform picture for valuations of semiconductor stocks. There is a “divergence across categories,” says Colello. “Digital chipmakers appear overvalued to us—the rise of AI is reasonably priced into shares of industry leader Nvidia—but other AI names appear too pricey. Analog/mixed-signal chip valuations are still below our fair value estimates, as near-term automotive and industrial demand is sluggish and inventory levels rise.”
Price to Fair Values of Semiconductor Stocks
The AI Semiconductor Stock Rally
The surge in semiconductor stocks was kicked off last May by Nvidia’s massive earnings beat, fueled by AI-related demand for its chips. Nvidia stock is up 226% in the 12 months and up more than 75% in 2024 alone. Colello says the AI “gold rush” is on, and Nvidia is the greatest beneficiary. Advanced Micro Devices AMD, which also designs GPUs, has similarly seen its stock jump 78% in the past 12 months.
Colello sees Nvidia as the biggest beneficiary of the AI “Gold Rush.”
“The primary story in semis in recent quarters has been the massive rise in revenue in AI accelerators, led by Nvidia’s Data Center GPU business,” he says. “We surmise that a wide array of businesses are seeking to build and deploy AI models, and such investments will occur in good times or bad.,” he says.
“We think more stellar demand for Nvidia’s AI products is in the cards for 2024, as demand should continue to outpace supply in the next few quarters,” Colello says.
Colello notes that Nvidia’s data center revenue rose fivefold from 2019 to 2022, and then more than tripled in 2023. “We expect it to more than double in 2024.... Given massive AI investments and supply constraints, we foresee Nvidia’s GPU revenue as locked in for most, if not all, of 2024, and perhaps 2025 as well,” he says.
Nvidia's Dominance in AI Should Continue in 2024
Historical and forecast data center revenue.
Those gains have helped the Morningstar US Semiconductor Index rally 106.54% last year and 34% in 2024 so far. Meanwhile, the Morningstar US Market Index is up 5.78% this year.
Semiconductor Stocks and the US Stock Market
The Digital/Analog Stock Divide
As demand increases for generative AI, Morningstar analysts predict that companies will continue to invest in this space regardless of the strength of the global economy. While digital chipmakers will likely ride the AI wave, it’s different for analog and mixed-signal semiconductor stocks
The sluggish demand for PCs and smartphones in early 2023 impacted analog and mixed-signal semis in addition to digital ones. Many of these firms create accessories like keyboards and headsets, and they thus depend on PC and phone demand. Analog and mixed-signal semis also include automotive chipmakers.
“After two years of peak business conditions in 2021 and 2022, analog/mixed-signal revenue started to roll over at the end of 2023, and we anticipate that a cyclical downturn will weigh on the industry in 2024,” says Colello. “We still see many signs of a cyclical slowdown, including higher inventory, lower order backlogs, and faster delivery lead times. Short-term selloffs in these stocks are often good times to buy, as this sub-segment of semis has many moaty businesses that can weather any looming storm.”
Throughout 2023, automotive chip sales outpaced US vehicle sales, thanks to rising chip content per car and a favorable mix shift toward electric vehicles. This provided tailwinds for firms like Texas Instruments TXN and Analog Devices ADI, but they’re subsiding as car inventory rises.
“We now fear that auto chip inventory exceeds end-market demand,” says Colello. “It’s unclear to us whether too many chips sit on the shelves of [manufacturers], or if the car companies built too many cars or the wrong types of cars—that is, too many electric vehicles and not enough gas-powered ones. If EV demand weakens more than anticipated, the automotive chip industry may face an even more severe cyclical downturn in 2024.”
The personal electronic industry outlook is also cloudy. “Just as we’ve seen with digital chipmakers, analog/mixed-signal chipmakers exposed to consumer electronics suffered in early 2023 from the sluggish demand environment for PCs and smartphones,” Colello explains. “We don’t expect an immediate bounceback in 2024 either, especially as some of the inventory overhang plaguing the industrial and automotive segments might be bleeding into consumer electronics too.”
For the long term, “we still don’t consider consumer electronic devices to be great markets for most chipmakers, relative to automotive, industrial, or data center,” Colello says.
Top 4 Undervalued Semiconductor Stocks
Semiconductor Stock Performance
Here’s a closer look at the four semiconductor stocks Morningstar’s equity analysts consider top picks. MediaTek does not have US-listed shares; it trades on the Taiwan Stock Exchange.
Undervalued Semiconductor Stocks
Infineon Technologies
- Fair Value Estimate: $54.00
- Morningstar Rating: 4 stars
- Morningstar Economic Moat Rating: Narrow
- Morningstar Uncertainty Rating: High
- Forward Dividend Yield: 1.05%
“Infineon Technologies is one of our top picks in the analog and mixed-signal chip space. We’re particularly bullish about the company’s opportunities in automotive semis, which make up over 40% of revenue. Infineon is the worldwide leader in power semis, and given the electrification of the car and the rise of electric vehicles, the company should be well positioned to aid in automotive powertrain development over the next decade, including the adoption of silicon carbide-based semis. We anticipate nice SiC adoption in its industrial segment, aiding in the rollout of renewable energy products, power infrastructure, and industrial automation products.”
Read more of Brian Colello’s analyst note on Infineon here.
STMicroelectronics
- Fair Value Estimate: $66.00
- Morningstar Rating: 4 stars
- Morningstar Economic Moat Rating: Narrow
- Morningstar Uncertainty Rating: High
- Forward Dividend Yield: 0.85%
“STMicroelectronics is one of our top picks in the analog and mixed-signal chip space. The company has healthy exposure to the automotive market with leadership in silicon-carbide-based semis, thanks to its strong partnership with Tesla and rising content in EVs with other carmakers. ST has also fared well in microcontrollers recently across many customers and end markets. We like ST’s exposure to the secular tailwinds around rising chip content per vehicle. We also think the market is generally too concerned about the excess supply of SiC semis coming online in the years ahead, as well as the likely expansion of Chinese semiconductor competitors. Both trends bear watching, but we think ST has been overly punished to date.”
Read more of Brian Colello’s coverage of STMicroelectronics here.
MediaTek
- Fair Value Estimate: TWD 1,400.00
- Morningstar Rating: 4 stars
- Morningstar Economic Moat Rating: Narrow
- Morningstar Uncertainty Rating: High
- Forward Dividend Yield: 8.42%
“MediaTek trades at a discount to our fair value estimate and offers a compelling forward yield. We think short-term worries about MediaTek ceding smartphone chipset market share to Qualcomm provide ample entry opportunity, as it still has plenty of headroom to expand its product portfolio on midrange to high-end 5G smartphones. We expect the company can achieve its midteens revenue three-year compound annual growth rate target and probably extend the streak to five years, as it is rapidly diversifying into ARM-based PCs, enterprise computing systems, and automotive infotainment systems. Autonomous driving and augmented reality devices are key growth drivers beyond the next three years, in our view.”
Read more of Phelix Lee’s report on MediaTek here.
Skyworks Solutions
- Fair Value Estimate: $133.00
- Morningstar Rating: 4 stars
- Morningstar Economic Moat Rating: Narrow
- Morningstar Uncertainty Rating: High
- Forward Dividend Yield: 2.65%
“We believe that Skyworks Solutions’ radio frequency (RF) products have enabled the world’s adoption of 4G, and increasingly now 5G, mobile devices, the paramount being Apple’s iPhone series. There have been recent concerns that Apple’s focus on expanding its internal chip capabilities will diminish its reliance on Skyworks. However, we view that assessment as vastly overstated as Skyworks’ products use different materials and have significantly different design expertise than Apple’s internal semiconductors. We believe Skyworks will achieve mid-to-high-single-digit long-term revenue growth as its RF parts will remain essential as more 5G phones enter the market.”
Read more of Brian Colello’s outlook for Skyworks Solutions here.
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