myGrilloCOM | Morningstar says the semiconductor sector is undervalued

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Semiconductors are looking undervalued, thanks to the selloff in some parts of the sector, according to Morningstar. The research firm said in a report released on Oct. 11 that it views semiconductor stocks as 15% undervalued on a median price or fair value estimate basis as of Oct. 3. That’s even more undervalued than the wider tech sector, which it believes is 5% undervalued. Morningstar noted such stocks have sold off a little in September, especially in analog and mixed signal names — two types of chips in the semiconductor industry — and even in artificial intelligence chipmakers. It noted Nvidia was down 10% for the month. Still, Morningstar remains positive on semiconductors, especially when it comes to the artificial intelligence trend. “There is no bigger story in semis in 2023 than the massive rise in revenue in AI accelerators, led by Nvidia’s data center GPU business,” said Morningstar’s director of technology equity research Brian Colello and associate equity analyst Jack Keegan. “We see the world’s leading cloud computing providers racing to buy enough GPUs to run generative AI for themselves and their customers, and we don’t see this demand slowing anytime soon,” they wrote. The outlook is bright regardless of how the economy does, Morningstar said. “If the global economy remains strong, we expect companies to invest in generative AI,” it said. “If the economy weakens, we expect companies to invest because of the potential efficiencies gained by implementing AI.” Outside the AI sector, the firm also likes autos, expecting more chips to be used in cars, especially electric vehicles, in the years to come. Top picks Short-term selloffs in analog and mixed signal chip stocks are “often good times” to buy this subsector, as it has many businesses “that can weather any looming storm,” said Morningstar. The firm’s top picks in this subsector are Infineon Technologies and NXP Semiconductors . Morningstar said it’s particularly bullish about Infineon’s opportunities in autos, which make up over 40% of its revenue. “[Infineon] should be well positioned to aid in automotive powertrain development over the next decade,” said Morningstar. It also likes NXP’s exposure to the automotive end market — where it gets 50% of its revenue. It described NXP as being “well diversified” in autos, and set to gain its fair share in electrification and safety auto products, such as radar and battery management systems. “Overall, NXP’s auto business is well tied to the secular tailwinds of rising chip content per vehicle, and we think the market is too focused on a near-term slowdown in demand,” Morningstar said. In other subsectors, it named Taiwanese stock MediaTek , which produces chips for mobile devices such as smartphones and tablets, wireless communications and others. It said MediaTek is trading at a “steep discount” to its fair value estimate of 1,400 New Taiwan dollars ($43.6). Currently, its stock is trading at NT$814. “We think short-term worries about MediaTek ceding smartphone chipset market share to Qualcomm provide ample entry opportunity, as MediaTek still has plenty of headroom to expand its product portfolio on midrange to high-end 5G smartphones,” Morningstar analysts wrote. Finally, Morningstar named Skyworks Solutions , saying its radio frequency products — which have enabled the adoption of 4G and 5G mobile networks — will remain essential as an increasing number of 5G phones enter the market. That will enable the company to achieve high single-digit long term revenue growth, Morningstar said.