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The semiconductor industry holds a pivotal role in shaping our technological landscape. From fueling artificial intelligence (AI) and cloud computing to powering 5G, electric vehicles (EVs), and the metaverse, semiconductors seemingly do it all.
However, 2023 has ushered in a unique blend of challenges and opportunities for this industry. While rising demand from autos and AI has been a boon for names like Nvidia (NVDA), there's also the ever-present overhang of U.S.-China tensions, supply and demand disruptions, and increasingly stiff competition to navigate.
With the broader VanEck Semiconductor ETF (SMH) down 7% for the month of August, it's fair to say some of these concerns are now priced in. In light of the group's pullback, here's a look at three semiconductor stocks projected to advance 20% or more from current levels, according to Wall Street analysts.
Microchip Technology: A Diversified and Profitable Semiconductor Leader
Microchip Technology (MCHP) is a standout player in the world of smart, connected, and secure embedded control solutions. Its expertise extends across diverse markets, from automotive and industrial to consumer, aerospace, and defense. With a solid market capitalization of $43.2 billion, the company is firmly in large-cap territory.
It's been a roller coaster ride for the stock lately, with MCHP now down 15% from July's all-time high of $94.30 - but still up 14% on the year. This sharp pullback could be a silver lining for savvy investors, offering a chance to grab MCHP at a relatively discounted price.
In its fiscal first quarter, the company reported revenue of $2.29 billion, up 2.5% from the previous quarter and a notable 16.6% increase from the same period last year. Notably, this revenue figure edged past the consensus estimate of $2.28 billion, while adjusted earnings per share of $1.64 arrived in line with expectations. This marked a surge of 18% from the prior quarter and the same period the previous year.
Microchip Technology also boasts a stable and growing dividend yield of 2.07%, surpassing the average yield of the S&P 500 Index ($SPX) at 1.3%. The cherry on top? An attractive valuation - MCHP trades at a price-to-earnings ratio of 12.98, which is below the semiconductor industry's average ratio of 21.9.
What's on the horizon next for MCHP? Well, according to Wall Street analysts, Microchip Technology could rally more than 20% in the coming year. Analysts have set an average 12-month price target of $98.26, implying a substantial 22.5% upside from current levels.
Out of the 19 analysts who follow the stock, 11 give it a strong buy recommendation, two suggest a moderate buy, and six advise holding onto it.
Advanced Micro Devices: An Innovator of High-Performance Computing and Graphics
Advanced Micro Devices (AMD), a global semiconductor giant, crafts high-performance computing and graphics products for gaming, data centers, and more. Valued at $165.2 billion, AMD doesn't offer quarterly dividends.
In Q2 2023, revenue hit $5.36 billion - down 17.6% YoY, but above the $5.34 billion consensus. Adjusted EPS was $0.58, down 56% YoY. For Q3 2023, AMD expects revenue of $5.6 billion to $6 billion, projecting 4.5%-12% sequential growth and 8%-16% YoY growth.
Zooming into the stock's performance, AMD has entered its own mini-bear market from June's 52-week high above $132, down more than 23% from this peak. However, the stock is still up more than 57% on a year-to-date basis, easily outperforming the broader equities market.
Despite the recent pullback, analysts remain bullish - and they expect AMD to not only reclaim, but surpass, its 52-week highs. The average 12-month price target for AMD is $141.03, implying 38% upside from here.
Out of 28 analysts following AMD, 21 recommend a strong buy, one suggests a moderate buy, and six advise holding the stock.
Wolfspeed: A Fast-Growing Semiconductor Player with Proprietary Technologies
Wolfspeed (WOLF), formerly known as Cree, specializes in cutting-edge silicon carbide (SiC) and gallium nitride (GaN) power and radio frequency (RF) devices. With its $5.67 billion market capitalization, Wolfspeed caters to customers in a variety of industries, from electric vehicles and renewable energy to 5G, aerospace, and defense.
In Q4 2023, revenue hit $235.8 million, which comfortably topped estimates for $224.5 million. However, the adjusted loss of $0.42 per share was wider than expectations, and Wolfspeed offered a softer-than-expected forecast for its fiscal first quarter, as well.
The stock sold off hard after this earnings disappointment, but Wolfspeed pared the worst of its losses after announcing the sale of its radio frequency business, Wolfspeed RF. While the shares are still down nearly 30% for the month of August, they've recovered more than 10% already from their immediate post-earnings lows set earlier this month.
Despite the stock's slide, WOLF's valuation remains a point of concern, as the price-to-sales ratio of 6.06 exceeds both industry and historical averages.
Nevertheless, analysts remain upbeat. The average analyst price target of $65.27 indicates 41% upside from current levels. In fact, the highest target of $155 implies a remarkable 235% upswing for WOLF.
Among 17 analysts, eight advocate a strong buy, eight recommend holding, and one leans towards a moderate sell.
Conclusion
Investors looking to add exposure to the semiconductor industry should keep an eye on Microchip Technology and Advanced Micro Devices after the recent price weakness, as these pullbacks could provide excellent opportunities to pick up shares of well-positioned market leaders. Microchip's impressive track record and solid market presence, and AMD's technological prowess amid industry shifts, hold the promise of substantial returns.
On the other hand, estimates for Wolfspeed may be overly optimistic, in light of the extreme share price underperformance and recently reduced guidance. While Wall Street still has high hopes for this semiconductor specialist, investors may prefer to look elsewhere in the space for opportunities to buy the dip.
On the date of publication, Ebube Jones did not have (either directly or indirectly) positions in any of the securities mentioned in this article. All information and data in this article is solely for informational purposes. For more information please view the Barchart Disclosure Policy here.
