Microchips highlight modern technology in today’s world and are a foundation of life as we know it. Around the size of a small coin, microchips enable everything we use daily to work correctly, including mobile devices, cars, computers, and even freezers. Simply put, they are everywhere.

When COVID-19 stormed the world by surprise, semiconductor-enabled technologies were a bright spot in an otherwise dark world. They allowed us to work, study, and stay connected remotely while the outside world quickly shut down. In turn, semiconductor stocks soared to new heights with no signs of slowing down.

However, throughout 2022, semiconductor companies’ valuations have been slashed, with many of the stocks coming well off of their 2021 highs. Why?

Unanticipated demand for microchips during the pandemic sent the supply chain entirely out of equilibrium, causing lead times to skyrocket. Blending this supply chain issue into an already volatile market environment with rising borrowing rates and surging energy costs undoubtedly fueled the fire sale as well.

The chart below illustrates the year-to-date performance of a few widely-known semiconductor arena players – Taiwan Semiconductor (TSM Quick QuoteTSM - Free Report) , Nvidia Corpotation (NVDA Quick QuoteNVDA - Free Report) , and Advanced Micro Devices (AMD Quick QuoteAMD - Free Report) – while also comparing the S&P 500.

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As we can see, all three of the companies are deep in the red for the year and have vastly underperformed the general market. Once we stretch the timeframe out to over the last two years, we can see just how massive of a run these stocks went on, still managing to post a better performance than the S&P 500 despite a poor 2022 performance so far. 

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Now that all of the fun seems to have come to a screeching halt, it raises a worthy question – are they still worth buying? Let’s look at valuation metrics and forecasted growth rates to get a clearer picture.

Advanced Micro Devices

Advanced Micro Devices (AMD Quick QuoteAMD - Free Report) rocky performance in 2022 has caused its current forward-earnings multiple to slide down to 22.9X, an absolute fraction of its 2020 high of 107.2X and well below its median of 53.6X over the last five years.

In fact, the current value is by far the lowest that it’s been in three years. To me, this looks like an excellent opportunity to scoop up shares at a much more attractive level relative to where the value has been in the past.

AMD is no stranger to beating EPS estimates, exceeding expectations in each of its last four quarterly reports by at least double-digit percentages, and acquiring an average EPS surprise of a notable 17%.

For the current year, the Zacks Consensus Estimate reflects full-year earnings growth of 45%. Additionally, AMD provided uplifting revenue guidance for 2022, held down by robust growth across all businesses.

Nvidia Corporation

Nvidia’s (NVDA Quick QuoteNVDA - Free Report) poor year-to-date share performance has caused its forward earnings multiple to retrace down to 39.3X, significantly lower than its 2021 high of 93.5X and well below its median of 49.9X over the last five years.

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The current value is the lowest that it has been since the pandemic lows in 2020, providing investors with a great opportunity that I’m sure many have been waiting for.

NVDA has exceeded EPS estimates in four out of its last four quarterly reports, acquiring an average EPS surprise of a respectable 7%. Current year EPS estimates are looking robust as well; the Zacks Consensus EPS Estimate is displaying a stellar 25% year-over-year growth in earnings.

Nvidia CEO Jensen Huang stated that the company had witnessed exceptional product demand due to how valuable its chips are in artificial intelligence and other intensive applications. Moving forward, NVDA expects this trend to continue.

Taiwan Semiconductor

Taiwan Semiconductor (TSM Quick QuoteTSM - Free Report) , similar to NVDA and AMD, has witnessed its forward earnings multiple slide down to 15.2X, just above its lows of 13.9X in 2019 and well below 2021 highs of 34.9X. Additionally, shares are currently trading at an 18% discount relative to the S&P 500’s forward earnings multiple of 18.5X.

Image Source: Zacks Investment Research

I believe TSM is in an excellent spot and flashing signs of being undervalued, aided by how much its forward P/E ratio has come down. Furthermore, TSM seems to be less volatile than other semiconductors, down 21% on the year, easily outperforming AMD’s and NVDA’s share decline of 39% and 33%, respectively.

The company has a strong track record of beating EPS estimates, exceeding expectations in its last four quarterly reports, and acquiring a trailing average EPS surprise of a solid 4.2%.

Full-year earnings for the current year are forecasted to grow nearly 45%, boosted by two positive estimate revisions from analysts over the past 60 days. TSM looks like a rock-solid investment for more conservative investors who still wish to obtain exposure to the semiconductor space.

Bottom Line

With the rout of the Nasdaq throughout 2022, we have watched semiconductor companies’ shares retrace to levels not seen in some time. This, paired with the chip shortage, has left investors frustrated and unsure of what’s to come.

However, I believe the sell-off has provided investors with an excellent opportunity to buy shares at much more attractive valuation levels. Additionally, current-year earnings growth rates are also looking very robust – another reason to block out the noise.

There is no doubt that microchips will continue to play a vital role in the world moving forward, and the pandemic has significantly sped up this “digital shift” that we have witnessed. Analysts believe that the chip shortage will subside in late 2022 and continue unwinding into 2023.

I believe that all three stocks mentioned would be great portfolio additions heading forward, but investors must be aware of the high volatility nature that these stocks carry.