Morningstar Announces Top Semi-Conductor Stocks to Own

Over the past year, semiconductor stocks have soared amid a frenzy of investor interest in artificial intelligence.

Graphics Processors (GPUs) are the chips that drive AI development. the PHLX Semiconductor Industry Index has spiked by 54% in the last 12 months.

INVISTA (NVDA) The 800-pound gorilla has dominated the artificial-intelligence GPU market and led the charge. In that time, its stock price has tripled and it has the third highest market capitalization in the U.S., behind Microsoft and Apple.

"We're seeing historic growth in demand for AI gas pedals, led by INVISTA," Morningstar analysts Brian Colello and Jivyaa Vaidya wrote in a report .

"In recent quarters, Nvidia has announced amazing revenue growth, raised the bar even higher for the next quarter, and then shot through that rosy forecast."

Nvidia and its CEO Jensen Huang have been leading the development of AI chips.

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Morningstar Semi-Guide Industry Overview

Demand for AI-related GPUs should remain strong, they said." We continue to see the world's leading cloud computing providers, and even countries, scrambling to buy enough GPUs to run generative AI for themselves and their customers."

This is true whether economic growth remains strong or weakens, analysts say.

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However, they see "a different picture in the non-AI space."" PC (personal computer) and smartphone chip demand is recovering from a cyclical bottom in 2022-23.

As for industrial chips, "demand [this year] seems to have hit the bottom of the doldrums, and as much as possible, companies are seeing some green shoots that point to a resurgence in the second half of 2024," Colello and Vaidya said.

As for automotive chips, demand for them was "the biggest question mark in the first-quarter earnings report," analysts said.

"After more than three years of rapid growth, automotive chip growth will grind to a halt, if not a modest decline. At worst, low demand for electric vehicles could plunge the auto industry into a deeper cyclical recession through much of 2024.

What is the valuation? As of April 1, based on analysts' fair value estimates of individual stocks, analysts believe the median price of the semiconductor industry is overvalued by 1%.

But Colello and Vaidya have a different view of the semiconductor industry: "Digital chipmakers seem to be overrated," they say.

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"The rise of artificial intelligence has had a justifiable impact on the stock price of industry leader Nvidia, but the stock prices of other AI companies seem too high."

However, the analysts say the situation is different for analog and mixed-signal chips." Their valuations remain below our fair value estimates as inventory levels continue to rise due to the recent downturn in automotive and industrial demand."

In terms of geography, "the pricing of the European companies is very attractive to us," the analysts said.

Morningstar's Most Undervalued Semi-Conductor Stocks

Among U.S.-listed tech stocks, Morningstar offers three of the best picks.

1. Infineon Technologies (IFNNY). Morningstar fair value estimate: $50. Tuesday's closing price: $34.10.

This German company is engaged in the field of analog and mixed-signal chips.

"We are particularly bullish on the company's growth opportunities in the automotive semiconductor space, which accounts for more than 40% of its revenues," the analysts said." Infineon is a global leader in the power semiconductor space.

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2. Italian semi-conductor (STM). Tuesday's closing price: $40.30.

The Swiss company is also in the business of analog and carpet signaling chips. Analysts say the company also has "a healthy exposure to the automotive market".

"It is a leader in the silicon carbide semiconductor space, thanks to its close collaboration with Tesla and with other automakers in the electric vehicle space.

3. Skyworks Solutions (SWKS) . Tuesday's closing rock price: $99.

"Skyworks' RF products drove the global adoption of 4G mobile devices, and now 5G mobile devices are becoming more prevalent," the analysts said. That means first and foremost Apple's iPhone.

While there are concerns that Apple's focus on making its own chips will reduce its reliance on Skyworks, "we believe this assessment is greatly exaggerated," they said.

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