Semiconductor stocks have struggled in recent months, with the PHLX Semiconductor index slumping 31% year to date.
So now may be a good time to jump into the space, but perhaps not where you might think.
“When most people think about investing in semiconductor stocks, their usual focus is on big chip producers such as Nvidia (NVDA) and Intel (INTC),” wrote Morningstar data journalist Lauren Solberg.
“But there is another way to play the latest trends in technology: the handful of major companies that supply semiconductor manufacturers with the tools and equipment they need to make the chips themselves.
“With many of these stocks having fallen faster than the broader equity market this year, they offer investors a chance to pick up these names at their lowest valuations in over a decade.”
It’s no wonder then that Morningstar is "most excited about the stocks of companies that are supplying semiconductor companies with the materials for production,” said Morningstar semiconductor analyst Abhinav Davuluri.
“Instead of having to worry about Nvidia versus Intel winning a deal, we are focused on the ‘arms dealers’ in that battle. They profit regardless of who wins the final chip design.”
Which Stocks To Invest In
Morningstar’s five undervalued choices: ASML (ASML), Teradyne (TER), Applied Materials (AMAT), Lam Research (LRCX) and KLA (KLAC).
ASML
“ASML has a wide economic moat based on its intangible assets around equipment design expertise in addition to research and development cost advantages required to compete for the business of leading-edge chipmakers,” Davuluri said.
Teradyne
“Teradyne’s automated test equipment for semiconductors (71% of 2021 sales) drives our wide moat rating,” wrote Morningstar analyst William Kerwin. “Teradyne’s ability to design testing equipment for bleeding-edge chips is the biggest driver of its competitive advantage.”
Applied Materials
“Applied Materials has a wide economic moat based on its intangible assets around wafer fabrication equipment design expertise and research and development, cost advantages required to compete for the business of leading-edge manufacturers,” Davuluri said.
“These characteristics have allowed it to become the top vendor in the semiconductor equipment market.”
Lam Research
“Lam is the market leader in dry etch and a prominent player in the deposition segment of the wafer fab equipment industry,” Davuluri said. “Deposition equipment applies thin-film layers to surfaces while etching selectively removes material. The combination of these two is critical during the chip fabrication process.”
KLA
“The firm’s large research and development budget allows it to stay at the forefront of the process diagnostic and control pace, with over 50% market share,” Davuluri said. “Also, its database of defects encountered by customers and their respective solutions help chipmakers in troubleshooting endeavors.”
