The tech sector is currently experiencing massive changes, sparked by the ChatGPT introduction and a stabilizing global economy. The stock market is also turning in a new direction, reflecting these secular market shifts on the fly.
Hidden at the bustling corner of Wall Street and Silicon Valley, three undervalued stocks are quietly setting the stage for what could be a year of magnificent growth. This narrative isn't just about technology's rapid evolution; it's about uncovering hidden treasures that are primed to thrive in the new year and beyond. Taiwan Semiconductor Manufacturing (TSM +0.42%), Kulicke and Soffa (KLIC +0.97%), and Skyworks Solutions (SWKS 1.10%) each tell a story of potential and promise, standing at the cusp of significant market transformations.
Three of The Motley Fool's top tech expert contributors are here to guide you through the near-term and long-haul potential found in these three tech titans. Read on to see why they might just be the investment highlights at the cusp of 2024.
NYSE: TSM
Key Data Points
An industry giant heating up, and on sale for 2024?
Nicholas Rossolillo (Taiwan Semiconductor Manufacturing): Contract semiconductor foundry Taiwan Semiconductor Manufacturing (or simply TSMC) has become something of a household name over the years. It's a key manufacturing partner for all sorts of chip designers, from Apple (AAPL +3.24%) and its best-in-class iPhone and M-series MacBook processors to Nvidia's (NVDA 0.48%) powerful artificial intelligence (AI) and computing accelerator systems.
In spite of claiming a long list of Who's-Who in high tech, TSMC has been in a slump in 2023. Blame a downturn in smartphone and PC sales, as well as mounting pressure on enterprise compute and industrial end markets. After a global chip shortage during the pandemic, there's now a bit of overhang of chip oversupply that's throttling demand for TSMC's chip fabs.
Data by YCharts.
But after reporting a number of months of sequential revenue decline, TSMC reported a sudden uptick in activity in October 2023. Revenue (in Taiwanese dollars) jumped nearly 16% year over year. It's still too soon to tell if this is the start of a new upcycle in chip demand, or just seasonality.
However, TSMC management has been clear it expects a new growth cycle to get kicking in 2024. Stronger demand for PC and smartphones could underpin this development, as inventory levels of chips have gotten healthier. And of course, there's Nvidia's skyrocketing growth, as it recently reported ample demand for its AI systems through the end of next year. That bodes well for TSMC's predictions that advanced AI chips will be a double-digit-percentage growth driver for the next few years -- helping TSMC toward its goal of 15% to 20% revenue growth through 2026.
There's all sort of stated (a bit overstated, in my opinion) geopolitical risk arising from tensions between Taiwan and China. But if you believe TSMC is nearing a new inflection point that will push revenue (and profits) higher, now could be a fantastic time to buy as 2024 approaches. TSMC stock trades for about 19 times next year's expected earnings per share, with upside if the top chip company can sustain its recent growth uptick.
NASDAQ: KLIC
Key Data Points
The chiplet era is upon us and Kulicke and Soffa will be a huge winner
Billy Duberstein (Kulicke and Soffa): At its recent AI conference, Advanced Micro Devices (AMD +1.64%) CEO Lisa Su upped her 2027 forecast for AI accelerators significantly, from $150 billion to $400 billion, while calling out AI as having the fastest pace of any technology she's ever seen.
My pick this week isn't AMD, but rather one of the companies that makes machines that construct its chips, especially the MI300. AMD's new MI300 AI accelerators are made via a "chiplet" architecture, which is a relatively new way to construct leading-edge processors. This occurs when an accelerator is broken down into optimized components, which are manufactured separately and then stitched together in a "superchip."
We are just at the beginning of the chiplet era, as packing more and more transistors onto a single die is getting more difficult. According to research firm TechSearch, chiplet production is set for 80% compounded growth through 2030. That's absolutely massive.
That will require a lot of advanced packaging equipment. And the cheapest among advanced packaging equipment stocks is Kulicke and Soffa.
KLIC's core business is in traditional ball bonder packaging, which is a legacy technology, but one which has been a resilient "workhorse" over decades. However, KLIC also has new fast-growing technologies in thermocompression bonding (TCB) for heterogeneous integration that can serve the advanced packaging needs of AI accelerators and chiplets.
On its recent fiscal fourth-quarter conference call, KLIC management noted that its TCB equipment had grown from the single-digit millions in 2020 to $64 million in the recently completed fiscal 2023, good for about 8.6% of revenue. But management expects high growth to continue to more than $100 million by 2025. That AI tailwind, along with some other new technologies KLIC has, such as advanced display microLEDs, should help bolster Kulicke's revenue and profits as it enters its next upcycle.
KLIC is coming off a massive downcycle for the chip sector, in which it earned just $0.99 per share in 2023. But that's after a massive boom in 2022, when it earned $7.09. Talk about cyclicality!
However, the midpoint of those two extremes is about $4, and KLIC's stock as of this writing is around $51.50. However, KLIC also has a massive $13.40 in net cash on its balance sheet, making its enterprise value only around $38 per share.
That's an enterprise value to normalized earnings ratio less than 10, which is certainly cheap for a high-performing company riding AI tailwinds.
NASDAQ: SWKS
Key Data Points
Diversifying beyond Apple: Skyworks' strategic shift
Anders Bylund (Skyworks Solutions): Having one key customer whose orders overshadow every other client put together comes with ups and downs. When that crucial contract-signer is doing well, everything is hunky-dory. You will also follow suit whenever your core customer struggles.
That's the situation for mobile chip designer Skyworks Solutions. iPhone maker Apple accounted for 66% of Skyworks' sales in fiscal year 2023, which ended on September 29. That's up from 58% last year and 59% in 2021. So when Apple's mobile device sales are soaring, Skyworks enjoys the good life. Recent trends have pointed in the opposite direction with weak demand for new iPhones and generally sluggish consumer spending. As the Cupertino giant clears out overstocked component and finished product pipelines, it is ordering fewer chips than usual from Skyworks and others.
So Skyworks' stock has swooned recently, turning in negative shareholder returns in the last six months. The stock trades more than 15% below its annual highs at the modest valuation ratio of 9.9 times free cash flow and 11.8 times forward earnings. To give these figures some context, closely matched mobile communications rivals such as Broadcom (AVGO +0.88%) and Qorvo (QRVO 0.76%) enjoy far richer valuations:
|
Company |
Price to Free Cash Flow |
Price to Forward Earnings |
|---|---|---|
|
Qorvo |
32.0 |
13.3 |
|
Broadcom |
24.7 |
19.7 |
|
Skyworks |
9.9 |
11.8 |
Data collected from Finviz.com on December 7, 2023.
Judging by its unflattering valuation ratios, you might think that Skyworks is struggling to keep the lights on. And the answer to that concern is a resounding "no."
Sure, slower Apple orders and the general inflation malaise led to lower sales in the recently reported fourth quarter. Top-line sales fell 13% year over year to $1.22 billion. At the same time, the company tightened up its spending and tripled its free cash flows compared to the year-ago period. And this is a sustained focus on cash profits, not an easily forgotten single-report anomaly. Free cash flows rose by 76% across the full fiscal year while cash-based profit margins doubled.
Meanwhile, Skyworks admits that its extreme reliance on Apple may be a mistake and is working hard to diversify its revenue streams. In the fourth quarter, for example, the company landed expanded or brand new design wins with networking equipment giant Netgear (NTGR 0.08%) and several top-of-the-line Android smartphones.
In particular, the contract for 5G networking functions in the Google Pixel 8 phones is notable because the last generation of that handset family baked the 5G modem into Alphabet's (GOOG +0.27%)(GOOGL +0.20%) own Tensor G2 chip. The Tensor G3 processor found at the heart of the Pixel 8 still includes a 5G modem, but bypassing that feature in favor of an added Skyworks solution gives the newer phone access to a wider range of radio bands.
So Skyworks' dependence on Apple may have increased in recent years but that trend should turn around in 2024 and beyond. And don't forget that market downturns don't last forever.
I can't wait to see Skyworks recover from the current gloom when the global economy stabilizes and consumers everywhere start to replace their aging iPhones and Androids again. Skyworks Solutions looks springloaded for dramatic gains over the next couple of years.
