Deep Dive

Philip van Doorn

Aug. 4, 2021, 9:03 a.m. EDT

Semiconductor stocks are rallying — and they still look like bargains

By Philip van Doorn

Semiconductor stocks haven’t risen in a straight line this year, but they have recovered from their last dip in May. Now the group is expected to maintain its head of steam through 2022 with faster growth than the broader stock market. But chip makers as a group trade below the broad indexes on a price-to-earnings basis.

Below is a list of the 10 semiconductor companies expected to increase sales the most through 2023.

Investors are paying close attention to this important technology subsector amid continuing shortages that are affecting many industries and presumably helping pricing for the chipmakers. For example, on Aug. 2, shares of ON Semiconductor Corp. (NAS:ON) rose 12% after the company beat analysts’ expectations for earnings and sales and provided an upbeat outlook . The improved guidance points to a coming round of estimate increases by analysts — the type of action that supports higher share prices over time.

ON CEO Hassane El-Khoury said there’s accelerating demand in “strategic automotive and industrial end-markets.”

Semiconductor performance and valuation

To set the stage, check out this chart showing total returns for the iShares Semiconductor ETF (NAS:SOXX) against the SPDR S&P 500 ETF (PSE:SPY) and the Invesco QQQ Trust (NAS:QQQ) (which tracks the Nasdaq-100 Index (AMERICAN:NDX) ) from the end of 2019 through July 30:

SOXX holds 30 stocks of the largest U.S.-listed semiconductor manufacturers and companies that make specialized equipment used by chip makers. The ETF is concentrated, with Nvidia Corp. (NAS:NVDA) making up 9.2% of the portfolio. The top five holdings, which also include Broadcom Inc. (NAS:AVGO) , Intel Corp. (NAS:INTC) , Qualcomm Inc. (NAS:QCOM) and Texas Instruments Inc. (NAS:TXN) , make up 35% of the portfolio.

That type of performance would lead investors to expect SOXX to trade higher on a price-to-earnings basis than the broader market, but this isn’t the case. Here’s how forward P/E ratios have moved on a rolling 12-month basis since the end of 2019:

Now let’s look at projected growth rates for sales, earnings per share and free cash flow per share for SOXX, SPX and QQQ through 2023, based on consensus estimates among analysts polled by FactSet.

First, sales:

ETF Expected sales increase – 2023 Expected sales increase – 2022 Expected sales increase – 2021
iShares Semiconductor ETF 4% 9% 27%
SPDR S&P 500 ETF Trust 5% 6% 14%
Invesco QQQ Trust 10% 10% 20%
Source: FactSet

The semiconductor group is expected to lead for sales growth during a banner 2021 and rank slightly behind QQQ in 2022. The projected sales-growth rate for QQQ is much lower for 2023, but that is pretty far out, considering how much sales (and sales estimates) have increased this year.

Here are growth projections for EPS:

ETF Expected EPS increase – 2023 Expected EPS increase – 2022 Expected EPS increase – 2021
iShares Semiconductor ETF -2% 12% 40%
SPDR S&P 500 ETF Trust 9% 9% 45%
Invesco QQQ Trust 8% 11% 38%
Source: FactSet

For EPS, the semiconductor group is expected to remain in the lead through next year, before cooling off in 2023.

Here are growth estimates for free cash flow per share:

ETF Expected FCF increase – 2023 Expected FCF increase – 2022 Expected FCF increase – 2021
iShares Semiconductor ETF -10% 20% 26%
SPDR S&P 500 ETF Trust 9% 15% 42%
Invesco QQQ Trust 10% 15% 30%
Source: FactSet

These are excellent numbers across the board for 2021 and 2022, with the semiconductor group expected to slow during 2023.

Fast-sales growers in the SOXX group

Now let’s look at projected compound annual growth rates (CAGR) for SOXX. Here are the 10 semiconductor companies expected by analysts to show the best three-year sales CAGR through calendar 2023, for which the underlying estimates are available (the sales numbers are in millions of dollars):

Company Three-year expected sales CAGR Estimated sales – 2023 Estimated sales – 2022 Estimated sales – 2021 Estimated sales – 2020
Advanced Micro Devices Inc. (NAS:AMD) 27.6% $20,260 $17,986 $15,433 $9,763
Marvell Technology Inc. (NAS:MRVL) 24.5% $5,693 $4,965 $4,116 $2,947
Universal Display Corp. (NAS:OLED) 23.5% $808 $680 $560 $429
Nvidia Corp. (NAS:NVDA) 23.2% $30,253 $27,138 $24,180 $16,189
Monolithic Power Systems Inc. (NAS:MPWR) 23.0% $1,573 $1,354 $1,168 $844
Cree Inc. 17.5% $1,242 $864 $660 $765
ASML Holding NV ADR (NAS:ASML) 17.5% $27,371 $25,346 $22,147 $16,886
Taiwan Semiconductor Manufacturing Co. Ltd. ADR (NYS:TSM) 17.2% $77,004 $65,528 $56,365 $47,860
Qualcomm Inc. (NAS:QCOM) 14.8% $37,057 $36,781 $33,853 $24,520
Lam Research Corp. (NAS:LRCX) 14.6% $18,600 $17,900 $16,119 $12,368
Source: FactSet

The sales numbers for 2020 are “estimated” because some companies’ fiscal periods don’t match the calendar.

Note that estimates for calendar 2023 aren’t yet available for five of the SOXX companies, including Micron Technology Inc. (NAS:MU) and Skyworks Solutions Inc. (NAS:SWKS) , which are expected to show the best two-year sales growth rates among the five.

For Micron, analysts expect sales to increase to $38.46 billion in 2022 from an adjusted $23.53 billion in 2020, for a two-year CAGR of 27.9%. For Skyworks, analysts expect sales to grow to $5.87 billion in 2022 from an adjusted $3.8 billion in 2020, for a CAGR of 24.3%.

Leaving the projected sales-growth winners through 2023 in the same order and adding Micron and Skyworks, here are forward P/E ratios and a summary of analysts’ opinions about the stocks:

Company Forward P/E Share “buy” ratings Closing price – July 30 Consensus price target Implied 12-month upside potential
Advanced Micro Devices Inc. (NAS:AMD) 40.4 59% $106.19 $111.70 5%
Marvell Technology Inc. (NAS:MRVL) 40.8 79% $60.51 $60.88 1%
Universal Display Corp. (NAS:OLED) 55.1 71% $234.49 $258.17 10%
Nvidia Corp. (NAS:NVDA) 48.6 83% $194.99 $194.04 0%
Monolithic Power Systems Inc. (NAS:MPWR) 60.5 77% $449.26 $462.38 3%
Cree Inc. N/A 29% $92.76 $114.69 24%
ASML Holding NV ADR (NAS:ASML) 41.5 73% $766.74 $797.78 4%
Taiwan Semiconductor Manufacturing Co. Ltd. ADR (NYS:TSM) 27.7 89% $116.64 $146.33 25%
Qualcomm Inc. (NAS:QCOM) 16.5 62% $149.80 $181.91 21%
Lam Research Corp. (NAS:LRCX) 19.0 73% $637.41 $746.90 17%
Micron Technology Inc. (NAS:MU) 7.3 88% $77.58 $120.55 55%
Skyworks Solutions Inc. (NAS:SWKS) 17.2 57% $184.51 $215.71 17%
Source: FactSet

The consensus price target for Nvidia is slightly lower than the closing price on July 30. So the analysts consider the stock to be fully valued. Then again, Wall Street is fixated on 12-month price targets — that’s actually a short period for committed long-term investors.

It’s also worth noting that Micron — one of the analysts’ favorites on the list — trades for a very low P/E.

Link to MarketWatch's Slice.