The semiconductor industry has underperformed since the beginning of the year as markets shifted to a risk-off territory. The iShares Semiconductor ETF (NASDAQ:SOXX), an exchange-traded fund that is a proxy of the chip industry, lost 18.06% year-to-date (YTD). It underperformed the SPDR S&P 500 Trust ETF (NYSEARCA:SPY), which decreased 10.53% in the corresponding period.
However, the semiconductor market has a promising future. It is forecast to grow at a reasonable pace between now and 2028, posting a compound annual growth rate of 8.6% to $803.15 billion.
In the past two years, the chip industry has been hit hard by supply chain disruptions, triggering ongoing shortages in many industries. In some markets, the absence of a single critical semiconductor has stopped entire production chains, significantly impacting end-market sales. In this context, semiconductor companies are likely to continue to have a pricing power edge this year, providing strong tailwinds to the industry.
Best Semiconductor Stocks
The recent sluggishness of semiconductor stocks is an opportunity to invest in a secular growth industry that has reached more acceptable valuation metrics after the correction of global markets witnessed since the beginning of the year.
Most of these chip stocks are established companies with a dominant market position and worldwide exposure. After looking at the semiconductor universe, I have chosen chip stocks based on strong profit margins and high top-line growth.
Furthermore, to choose the best semiconductor stocks, I have considered companies with acceptable forward valuation metrics in terms of both price-to-earnings (P/E) ratios and enterprise-value-to-earnings before interest, taxes, depreciation and amortization (EV/EBITDA). I have compared each valuation with the mean of the industry, which currently trades at a P/E of 23.48x and an EV/EBITDA ratio of 9.48x.
Taiwan Semiconductor Manufacturing Company (TSM)
TSM, a Taiwan-based semiconductor company, is the largest and undisputed global leader in integrated circuit (IC) manufacturing. The IC company’s net margin stretched to 37.6% in 2021 and is expected to rise to 39.3% in 2022. TSM’s top-line growth is forecast to improve significantly this year, with net sales lifting 26.3% YOY to $70.4 billion.
Since the beginning of 2022, TSM stock fell 18.9%. The semiconductor stock exchanges at a 2022 P/E ratio of 18.9x and an EV/EBITDA ratio of 10.7x. The consensus of Wall Street analysts forecasts an average target price of $142 per share.
Advanced Micro Devices (AMD)
AMD stock is a global company specializing in the manufacturing of semiconductors devices and microprocessors for computer processing.
The profit margins of the semiconductor company reached 19.2% in 2021, but are expected to advance 21.9% this year. Revenue is forecast to advance at a rapid pace in 2022, surging by 54% to $25.3 billion.
Since the beginning of the year, the stock of Advanced Micro Devices plunged 30%. AMD stock is currently valued at a 2022 P/E ratio of 30.7x and a forward EV/EBITDA ratio of 21.8x. The consensus of Wall Street expects a mean target price of $154.24 per share in the next year
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