Semiconductors are vital for the global economy, found in everyday products like computers, smartphones, cars and other products. The strong demand for semiconductors has helped many companies maintain steady revenue and profit growth. The rising demand for artificial intelligence (AI) tools has created another opportunity for semiconductor stocks. While many stocks can benefit from the AI boom, some stocks have become overvalued. Investing undervalued semiconductor stocks is the smart move for savvy investors.
This value investing approach gives investors a higher margin of safety and still presents potential upside. These undervalued semiconductor stocks can reward investors who want an affordable entry into the industry.
ASML (ASML)
ASML (NASDAQ:ASML) is a semiconductor titan from the Netherlands that has delivered exceptional returns for investors. Shares have jumped by 240% over the past five years, but year-to-date (YTD) gains remain relatively muted compared to other semiconductor stocks.
The YTD gain for ASML is ‘only’ 37%. However, the company’s stellar financials and forward P/E ratio of 36 can present a buying opportunity for investors. ASML also exceeded guidance in the first quarter and expects sales to rise by 25% in 2023. The company specializes in making chips smaller, which translates into more computing power.
No other company currently has the necessary technology to print advanced microchips. ASML has a monopoly in the industry, and intense corporate security protocols help to ensure the company’s tech never reaches competing corporations and countries.
ASML is Europe’s most valuable tech firm. The company’s revenue and earnings growth, along with its monopoly, suggest ASML will hold onto that title for a long time.
Broadcom (AVGO)
Broadcom (NASDAQ:AVGO) is closing in on its all-time high, but the company still maintains a healthy 28 P/E ratio.
Revenue jumped by 8% year-over-year in the latest quarter, and net income went up by 34%. High net income growth will support a lower P/E ratio in the future. “We generated $4.4 billion in free cash flow and expect cash flows to remain strong for Q3,” the CFO of Broadcom, Kristen Spears, stated.
The company is well-positioned to benefit from the artificial intelligence boom. A Bank of America analyst recently called Broadcom the ‘best-in-class’ chip stock for the AI boom.
Despite the rally, Broadcom still has a 2% dividend yield and has a good history of growing its dividends. The company raised its annual dividend from $16.40/share to $18.40/share, representing a 12.2% year-over-year dividend hike. The company is set to raise its dividend again in December if it upholds previous dividend hikes.
Qualcomm (QCOM)
Qualcomm (NASDAQ:QCOM) hasn’t been as successful as other semiconductor stocks. Shares are only up by 15% YTD and have more than doubled over the past five years.
The company has also reported declining revenue and earnings over the two previous quarters. In the most recent quarter, Qualcomm reported a 17% revenue drop and a 42% net income drop.
Despite the slowdown, the company did increase the quarterly cash dividend by 7%, raising the annual payment to $3.20 in the process. The dividend hike offers a silver lining, but investors will want to see revenue and earnings growth become positive in the future.
That future can arrive soon with the rise of AI and the technology’s reliance on semiconductor chips. Qualcomm envisions making AI ubiquitous, and that goal can help Qualcomm deliver returns for shareholders.
You might earn higher returns with other semiconductor stocks. However, Qualcomm is an undervalued semiconductor stock in part because of its 13 P/E ratio. It’s hard to see the company not turning around its two slow quarters as AI gains traction. Qualcomm shares are more than 30% down from their all-time high.
On this date of publication, Marc Guberti held long positions in ASML, AVGO and QCOM. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.