Tech stocks have been hammered this year, but the cyclical semiconductor industry has been hit especially hard. The market thinks a severe cyclical downturn is coming, hastened by slowing global economic growth and maybe even a recession. Semiconductor stocks are down 44% year to date as measured by the iShares Semiconductor ETF.
There are some real gems in this industry, though. Designing and manufacturing technology's most basic building blocks is ludicrously technical, creating businesses with strong competitive advantages and fat profit margins. The sharp sell-off looks like an opportunity to three Fool.com contributors. They think Intel (INTC 0.64%), Micron Technology (MU -0.60%), and ASML Holding (ASML -1.03%) are a buy for the long haul. Here's why.
Long-term winner Intel is on fire sale for shortsighted reasons
Anders Bylund (Intel): Chip giant Intel is having a rough year. The stock has lost more than 50% of its value over the last 12 months, falling far behind the S&P 500 index's 18% drop. Intel shares are trading at prices not seen since the spring of 2014.
Over that eight-year period, Intel's top-line sales have increased by 39% while earnings before interest, taxes, depreciation, and amortization (EBITDA) rose by 62%. As a result, the stock now trades at the lowest price-to-sales and price-to-EBITDA ratios in Intel's legendary history.
This situation would make sense if Intel was knocking on death's door, stumbling at the edge of the abyss, flirting with bankruptcy. In all fairness, both revenue and profits have slowed down in 2022 due to economic pressures. However, the company still collected $73.4 billion of revenue over the last four quarters while generating $12.6 billion in normalized net income and $33.8 billion of EBITDA profits.
Intel is operating under a relatively fresh management team, which still has to operate under the three-to-five-year processor development cycle its predecessors started. That's not easy, especially during a global economic crisis and a multi-year shortage of semiconductor manufacturing capacity. And don't forget that the previous leadership group was a hastily thrown-together emergency solution, led by Intel's former CFO Bob Swan. The new group has a lifelong engineer at the helm in Pat Gelsinger, and his management style has zeroed in on innovation and sustainable execution for the long haul.
Under Gelsinger's reign, Intel's manufacturing process improvements are back on track with their long-term improvements. Furthermore, the company is investing billions of dollars in new, expanded, and upgraded chip-building facilities in places like Arizona, Ohio, Germany, and Italy. In fact, Gelsinger is reselling Intel's manufacturing capacity to other semiconductor designers, opening up a brand new revenue stream and helping the chip industry pull itself up by its collective bootstraps.
Intel is an industry titan with unmatched financial resources and ambitious plans for the long haul. You can call 2022 a rebuilding year, setting the stage for a clean bill of operating health in 2024 and beyond. It makes a ton of sense to pick up Intel shares while market makers are slashing share prices for shortsighted reasons. That's a smart investment that should deliver fantastic returns in the long run.
This memory chip stock is about as cheap as you'll ever see it
Billy Duberstein (Micron Technology): Memory chip manufacturer Micron had a terrible quarter when it reported fiscal fourth-quarter results on Sept. 29, with revenue down 23% quarter over quarter. Management guided for an even worse current quarter, with revenue set to fall another 36% and profits to drop to essentially breakeven.
Memory demand and pricing have plummeted as interest rates have risen and companies pulled back after the pandemic boom in digitization. This has been especially acute in the PC industry, where shipments were down a stunning 19.5% relative to last year in Q3, according to Gartner.
Miraculously, Micron's stock is still around levels it traded at three months ago, prior to reporting the past two dismal quarters. That shows just how cheap the stock had become. Micron now hovers just above 1.1 times book value, which is close to trough valuations seen over the past decade.
Data by YCharts.
Memory pricing should improve over time, however. Micron and its competitors have announced dramatic cutbacks in production for the year ahead, with Micron cutting capital expenditures by one-third, including a near-50% reduction in semiconductor equipment investment in 2023. The day after Micron's announcement, Japanese NAND flash competitor Kioxia, which partners with Western Digital, announced a 30% reduction in NAND flash production. Korean competitor SK Hynix may cut capital expenditures by 25% next year, according to Bloomberg News.
With the memory industry highly consolidated and virtually all major memory companies cutting production, that should balance the market in time -- maybe within the year.
In addition, new, more restrictive curbs on sales of chip-making equipment to China may be bad for some chip stocks, but appears to actually be good news for Micron. That's because the new rules will essentially limit China to producing only lagging-edge memory, limiting Chinese-made DRAM to 18nm and above, and NAND flash chips of 128 layers and below. The new rules not only limit potential up-and-coming Chinese competitors, but could also delay equipment to fabs of non-Chinese companies operating within China. For instance, South Korea's SK Hynix has a large NAND fab in China, and that fab will now have to get a license in order to continue getting U.S.-made equipment.
Micron is the only U.S. company to produce DRAM and one of two to produce NAND flash, and will get generous subsidies from the CHIPS Act. It also has a lead in both DRAM and NAND leading-edge technology, which it gained over just the past few years under CEO Sanjay Mehrotra. Over the long term, Micron seems like a solid buy at this low point in the memory cycle.
About as close to a monopoly as you'll find in the tech world
Nicholas Rossolillo (ASML Holding): For decades now, chip computing power has exponentially increased all the while using less power and decreasing in cost. But manufacturing technology is beginning to bump up against what's physically possible. It will be much harder to get more computing power from the same sized chip going forward than it has been in years past. That's where ASML Holding comes in.
The Dutch company developed a system called extreme ultraviolet (EUV) lithography -- a process in which layers of a chip are "printed" on top of each other. An EUV system can print these layers with nanometers of precision, which will help extend the ability to shrink down chip technology (making it more powerful, and more efficient) in the decades ahead. Only ASML makes EUV lithography equipment. Less precise deep ultraviolet (DUV) lithography that ASML makes has some competition, but as far as EUV goes, ASML is essentially a monopoly for now.
Chip demand is expected to rise throughout the 2020s, and as semiconductors get more complex, ASML will have plenty of places to sell its complex and expensive EUV equipment. That's not to say this company is a risk-free investment. Authorities in both the U.S. and the Netherlands are putting limits on advanced equipment that can be sold to China, which has put a damper on ASML's growth trajectory for now. Supply chain issues have also limited the number of machines it can get shipped out the door.
But the U.S. CHIPS Act and other legislation around the world aimed at bolstering domestic technology manufacturing is only just starting to kick in, and ASML could be a huge winner. Lots of chipmakers will need ASML's equipment to update or expand fabs, or build brand new ones. The stock currently trades for 15 times trailing-12-month free cash flow. If the global economy hits a rough patch in the coming months, ASML's profitability could dip and this valuation could get less "cheap." Nevertheless, this looks like a fantastic value right now for the long term.
