Semiconductor stocks have soared over the past year amid investor mania for artificial intelligence.
Graphics processing units (GPUs) are the chips that fuel AI. The PHLX Semiconductor Sector index has jumped 54% over the last 12 months.
Nvidia (NVDA) , the 800-pound gorilla that dominates the GPU market for AI, has led that rally. Its shares have tripled over the period, giving it the third highest market capitalization in the country, after No. 1 Microsoft and Apple.
“We are seeing a historic rise in demand for AI, accelerators, led by Nvidia,” Morningstar analysts Brian Colello and Jivyaa Vaidya wrote in a report.
“In recent quarters, Nvidia has reported staggering revenue growth, raised the bar for the next quarter even higher, and then smashed through such rosy forecasts.”
Morningstar's overview of semiconductor industry
Demand for AI-related GPUs should remain strong, they said. “We still see the world’s leading cloud computing providers, and even nation states, racing to buy enough GPUs to run generative AI for themselves and their customers.”
That’s true whether economic growth stays strong or weakens, the analysts said.
Related: Analyst updates Nvidia stock price target after stocks tumble
However, “the non-AI landscape is a different story,” they maintain. “PC [Personal computer] and smartphone chip demand is recovering from cyclical bottoms in 2022-23.”
As for industrial chips, “demand seems to be mired in the bottom of a downturn [this year], although firms are seeing some green shoots that suggest a recovery in the second half of 2024,” Colello and Vaidya said.
Turning to automotive chips, demand for them is “the biggest question mark heading into first-quarter earnings,” the analysts said.
“At best, auto chip growth will grind to a halt, if not fall modestly after three-plus years of great growth. At worst, sluggish demand for electric vehicles may drive the auto space into a deeper cyclical downturn for most of 2024.”
And what about valuations? As of April 1, the analysts viewed the semiconductor industry as 1% overvalued on a median price basis, according to its analysts’ fair value estimates of individual stocks.
But Colello and Vaidya have a differentiated view of semiconductor industries, “Digital chipmakers appear overvalued,” they said.
Related: Analyst revamps Nvidia stock price target as Mag 7 earnings loom
“The rise of AI is reasonably priced into shares of industry leader Nvidia, but other AI names appear too pricey.”
Still, it’s a different story with analog and mixed-signal chips, the analysts said. “Their valuations are still below our fair value estimates, as near-term automotive and industrial demand is sluggish and inventory levels continue to rise.”
In terms of geography, "European names look attractively priced to us," the analysts said.
Morningstar’s most undervalued semiconductor stocks
Morningstar offered three top picks among U.S.-listed tech stocks.
1. Infineon Technologies (IFNNY) . Morningstar fair value estimate: $50. Tuesday closing price: $34.10.
The German company is in the analog and mixed-signal chips space.
“We’re particularly bullish about the company’s opportunities in automotive semis, which make up over 40% of its revenue,” the analysts said. “Infineon is the worldwide leader in power semis.”
More Wall Street Analysts:
- Analyst unveils new Nike price target ahead of big summer for sports
- Analysts weigh in on Google-parent Alphabet’s stock after cloud event
- Analysts revamp Disney stock price target after proxy fight
2. STMicroelectronics (STM) . Morningstar fair value estimate: $66. Tuesday closing price: $40.30.
This Swiss company is also in the analog and mixed-signal chips space. And it too has “healthy exposure to the auto market,” the analysts said.
“It’s a leader in silicon-carbide-based semis thanks to its strong partnership with Tesla and rising content in EVs with other carmakers.”
3. Skyworks Solutions (SWKS) . Morningstar fair value estimate: $133. Tuesday closing price: $99.
“Its radio frequency products have enabled the world’s adoption of 4G, and increasingly now 5G, mobile devices,” the analysts said. Above all, that means Apple’s iPhones.
While there’s concern that Apple’s focus on making its own chips will lessen its dependence on Skyworks, “we view that assessment as vastly overstated,” they said.
Related: Veteran fund manager picks favorite stocks for 2024
