The semiconductor industry is having a mixed year. In continuation of last year's astonishing performance by the broader technology sector, the semiconductor industry was doing well. However, market participants' concerns about overvaluation of the technology sector and impending inflation led to price correction and semiconductors are no exception.
Nevertheless, a few semiconductor stocks with a top Zacks Rank are currently available at attractive valuations with immense upside left for the rest of 2021. Investment in these stocks may be fruitful going forward.
A Mixed 2021 So Far for Semiconductor Industry
The semiconductor industry started 2021 impressively as it is at the forefront of the ongoing technological revolution based on HPC, AI, automated driving, IoT and so on. These companies also enable the cloud to function and help analyze data into actionable insights that can be used by businesses to operate more efficiently.
The Philadelphia Semiconductor Index (SOX) is up 5.7% year to date. However, the index jumped 18.5% to reach its 52-week high of 3,314.16 on Apr 5.Thereafter, the SOX slid 10.8% till May 17. on concerns about higher valuation, inflationary expectations and the possibility of the Fed raising the benchmark interest rate earlier than expected.
Expectation of Budgetary Support
On May 14, Reuters reported that this week the U.S. Senate will debate on a bill to spend more than $110 billion on basic U.S. and advanced technology research to combat the growing competitive threat from China.
The bill will include $39 billion in production and R&D incentives for semiconductor chips and $10.5 billion to implement programs including the National Semiconductor Technology Center, National Advanced Packaging Manufacturing Program, and other R&D programs.
Moreover, Reuters reported that a group of Senators are expected to introduce a package of $52 billion to boost semiconductor chip production and R&D activities over a period of five years. Notably, President Joe Biden also expressed his intention to provide a $50 billion budgetary support to accelerate semiconductor production and research.
Per Reuters, the bill has expressed concern that the United States had a 37% share of the global semiconductor and microelectronic production in 1990, which has drastically dropped to just 12% as of now.
Consequently, U.S. businesses, especially the auto and high-tech industries are suffering from an acute shortage of chipsets owing to the breakdown of the global supply chain during the pandemic.
Additionally, the Asian giant China is aggressively spending more than $150 billion to boost semiconductor manufacturing and unsettle the United States from its global leadership in this key technology. These show the urgency of the U.S. Congress to strengthen its high-tech semiconductor industry.
Our Top Picks
We have narrowed down our search to five large-cap (market capital $10 billion) semiconductor stocks that have attained a 52-week high this year but are currently trading at a discount.
These stocks have strong growth potential for the rest of 2021 and have witnessed solid earnings estimate revisions within the last 30 days. Each of our picks carries a Zacks Rank #2 (Buy). You can see
. the complete list of today’s Zacks #1 (Strong Buy) Rank stocks here
The chart below shows the price performance of our five picks year to date.
NVIDIA Corp. ( NVDA Quick Quote NVDA - Free Report) is the worldwide leader in visual computing technologies and the inventor of the graphic processing unit, or GPU. Over the years, the company’s focus has evolved from PC graphics to AI- based solutions that now support high-performance computing, gaming and virtual reality platforms.
The company has an expected earnings growth rate of 36.1% for the current year. The Zacks Consensus Estimate for the current year has improved 0.4% over the last 7 days. The stock is currently trading at a 12.6% discount from its 52-week high attained on Apr 15.
Texas Instruments Inc. ( TXN Quick Quote TXN - Free Report) serves individuals and corporations (personal communications, calculators), industrial customers (a large number of customers across many markets and automotive manufacturers) and infrastructure providers (communications segment). The emergence of 5G technology is aiding the performance of its analog products in the communication equipment market.
The company has an expected earnings growth rate of 23.3% for the current year. The Zacks Consensus Estimate for the current year has improved 8.7% over the last 30 days. The stock is currently trading at an 8.5% discount from its 52-week high attained on Apr 5.
Advanced Micro Devices Inc. ( AMD Quick Quote AMD - Free Report) plans to expand its semi-custom chip business into high-growth markets such as the semi-custom ultra-low power client, embedded, dense server and professional graphics markets, offering differentiated products using its APU and graphics IP. Its Vega-based GPUs increasing demand for both gaming and blockchain industries are key catalysts.
The company has an expected earnings growth rate of 65.9% for the current year. The Zacks Consensus Estimate for the current year has improved 10.9% over the last 30 days. The stock is currently trading at a 24.8% discount from its 52-week high attained on Jan 11.
ON Semiconductor Corp. ( ON Quick Quote ON - Free Report) is seeing strengthening demand across most end markets as evident from its bookings trends over the last few quarters. ON Semiconductor has a well diversified business generating a significant percentage of revenues from each of the computing, consumer, industrial, communications and automotive end markets.
The company has an expected earnings growth rate of more than 100% for the current year. The Zacks Consensus Estimate for the current year has improved 17% over the last 30 days. The stock is currently trading at a 17.6% discount from its 52-week high attained on Apr 6.
Monolithic Power Systems Inc. ( MPWR Quick Quote MPWR - Free Report) is benefiting from the increasing demand for analog ICs and sensors from the automotive industry. Monolithic is also investing in markets like industrial, server and communications that have strong growth potential over the long term. The ongoing adoption of cloud computing is driving demand for servers, which bodes well for its power management solutions.
The company has an expected earnings growth rate of 31% for the current year. The Zacks Consensus Estimate for the current year has improved 14.4% over the last 30 days. The stock is currently trading at a 23.2% discount from its 52-week high attained on Jan 25.
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