The Last Place You Thought You’d Find Value: Chip Stocks

Why it’s hard to find a semiconductor stock considered a value investment, and two that might just check all the boxes.

circuit board

When you think of value investing, most don’t associate semiconductor stocks. The companies that develop the chips that drive all of our technology are rarely “on sale” and in fact, they usually range from “expensive” to “extremely expensive.”

What keeps them expensive? The answer to that is easy:

  • Rapid near-term growth
  • Strong forward visibility provided by the inexorable increase in demand for smarter and faster computing power
  • The barriers to entry keep rising – not just anyone can design a leading-edge semiconductor, let alone build a factory that can produce them

Today, despite continued expansion of the industry’s production capacity, there is a surprising shortage of semiconductors. Automobile makers are but the most visible example of companies being squeezed as they can’t get enough chips.

Value investors have benefitted from the strong rebound in out-of-favor stocks in recent quarters. At some point, this upcycle will fade, leaving bargain hunters wondering where they can yet again produce strong returns.

For those yearning to ease their value constraints, one place to look is among the weakest of the major semiconductor companies. While not obviously out-of-favor, we list two that have some “issues” yet may offer a value-oriented way to participate in the industry’s growth.

Intel Corporation (INTC)
Intel is the iconic producer of chips for personal computers, servers and a wide range of other computation-intensive applications. Due to strategic and operational blunders, the company is struggling to catch up to leading-edge chip production capabilities. Taiwan Semiconductor (TSM) is now widely recognized as having a one- or two-generation lead – while not insurmountable the gap presents Intel with a severe challenge.

However, Intel has new and exceptionally capable leadership and at least one attentive activist investor (along with legions of passive investors) closely monitoring its turnaround. And, its strategic value to the United States’ technology security is a highly valuable intangible asset. The shares have been stagnant for nearly three years, despite their recent surge, and trade at only 12.8x estimated 2021 earnings, while also offering an above-market 2.3% dividend yield.

Cirrus Logic (CRUS)
Cirrus Logic produces a wide range of semiconductors that connect the digital and analog worlds. In the past, investors were pleased to participate in the company’s close and prosperous relationship with Apple, which produces over 80% of Cirrus’ revenues. However, as Apple appears to be taking more control over its semiconductor procurement, CRUS shares have slipped in investors’ regard.

The recent profit slowdown hasn’t helped, either. The company is now more aggressively working to reduce its reliance on Apple. New initiatives include developing and shipping chips to Android-based smartphone producers, expanding its chips’ usefulness in other devices, and developing chips for new but adjacent segments. While the shares have recently been strong, they have lagged other chip stocks. Trading at 18x forward earnings, they still remain a relative bargain in the industry.

Do you invest in chip stocks? Have you ever gotten them at a bargain price?

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