The semiconductor sector attracted a stampede of bulls last year as the ongoing chip shortage highlighted its secular growth potential. But this year, the bulls retreated amid concerns about sluggish PC sales, cooling economic growth, and a possible overproduction of chips.
Runaway inflation, rising interest rates, supply chain disruptions, the war in Ukraine, and other macro headwinds then exacerbated that pain and drove investors toward more conservative sectors. As a result, the Philadelphia Semiconductor Index lost about 35% of its value this year.
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However, that sell-off has also created some great buying opportunities for investors who can stomach the near-term volatility. Let's examine three unloved chip stocks that could go parabolic if the macroeconomic situation improves: Taiwan Semiconductor Manufacturing Company (TSM +6.30%) (more commonly known as TSMC), Broadcom (AVGO 0.52%), and Skyworks Solutions (SWKS 10.47%).
1. TSMC
TSMC is the world's largest and most advanced contract chipmaker. Its scale and early investments in ASML's extreme ultraviolet (EUV) lithography systems enabled it to pull ahead of its two closest rivals, Samsung and Intel, in the "process race" to create smaller, denser, and more power-efficient chips.
NYSE: TSM
Key Data Points
As a result, major chipmakers like AMD, Nvidia, Qualcomm, and Apple (AAPL +1.18%) all consistently outsource the production of their chips to TSMC. TSMC's stock has lost a third of its value this year as investors fretted over slowing PC sales, macro headwinds for other chip markets, and the rising R&D and production costs of the world's tiniest 3-nanometer and 2-nanometer chips.
However, analysts still expect TSMC's revenue to rise 33% this year and 14% in 2023. Its earnings per share are also forecast to increase 46% this year and grow another 9% in 2023 -- even as it boosts its capex to record levels to maintain its lead over Samsung and Intel. TSMC's business has always been cyclical, but its stock now trades at just 13 times forward earnings after its recent sell-off. Therefore, I believe that any positive news about the chip sector in this gloomy market could spark a fierce rally for TSMC.
2. Broadcom
Broadcom manufactures a wide range of chips for the data center, networking, software, storage, and industrial markets. Last year, it generated a fifth of its total revenue from Apple, which uses Broadcom's chips in its iPhones, iPads, and other hardware devices.
NASDAQ: AVGO
Key Data Points
Broadcom generates about a quarter of its sales from its newer infrastructure software business, which emerged from its acquisitions of CA Technologies and Symantec's enterprise security business. That segment will grow even larger if it closes its planned takeover of Vmware, which was announced this May.
Broadcom benefited from robust sales of cloud, data center, and wireless chips last year, but that demand has been cooling off in a post-lockdown market. However, analysts still expect its revenue and earnings to grow 20% and 32%, respectively, this year.
In 2023, the company is expected to increase its revenue and earnings by 6% and 8%, respectively -- but that doesn't include any potential gains from Vmware. Based on those projections, Broadcom trades at just 13 times forward earnings while paying an attractive forward dividend yield of 3.4%.
Broadcom's stock price has tumbled about 30% this year, but its low valuation, high yield, and well-diversified business should limit its downside potential. Like TSMC, it will also likely pop on any positive catalysts for the chip sector.
3. Skyworks Solutions
Skyworks Solutions produces wireless chips for the mobile, automotive, home automation, wireless infrastructure, and industrial markets. Like Broadcom, it's also a major Apple supplier, generating a whopping 59% of its revenue from the tech giant in fiscal 2021 (which ended last October).
NASDAQ: SWKS
Key Data Points
However, Skyworks has been gradually diversifying its business away from Apple by producing a wider range of chips for Android smartphones, wearables, smart home appliances, industrial Internet of Things (IoT) devices, and connected vehicles. Last year, it acquired Silicon Laboratories' infrastructure and automotive unit to accelerate that transformation.
Skyworks might struggle with slower sales of iPhones and other consumer electronics over the next few quarters, but it's still generating strong growth across the automotive, industrial, and infrastructure markets. It also expects to sell an increasing number of chips with every new wireless network standard. For example, it estimates that each 5G smartphone uses $25 worth of front-end chips, versus $18 per 4G device and $8 per 3G device.
That's why Wall Street still expects Skyworks' revenue and earnings to grow 8% and 6%, respectively, this year. In 2023, they project its revenue will rise another 6%, with 9% earnings growth. Based on those forecasts, Skyworks trades at just eight times forward earnings while paying a forward dividend yield of 2.4%. That single-digit multiple makes Skyworks a great turnaround candidate if investors finally warm up to semiconductor stocks again.
