Following a rally led by Nvidia (NVDA), the prevailing wisdom is that semiconductor equities — particularly those with artificial intelligence (AI) exposure — are richly valued. After Nvidia slumped 10% last Friday, perhaps that stock will be more attractive on valuation.
It’s clear some other semiconductor names already are. Some of those names reside in the VanEck Semiconductor ETF (SMH). The ETF allocates about a third of its weight to Nvidia and Taiwan Semiconductor (TSM). That indicates the ETF has leverage to a potential Nvidia rebound. At the same time, it could provide investors with one of the largest allocations to Taiwan Semiconductor. That’s the world’s largest chip foundry operator.
Adding to the emerging valuation case for SMH is the point that the ETF isn’t AI-dedicated. Some of its holdings with exposure to markets such as automotive, industrial, and smartphones are among the semiconductor stocks sporting compelling valuations.
AI Chip Names Expensive, But There’s Good News
Nvidia and other AI chip equities might need to retreat further before market participants view those names as reasonably valued. But the good news for bargain hunters is that scenario isn’t uniform across the entire semiconductor space.
“Digital chipmakers appear overvalued to us—the rise of AI is reasonably priced into shares of industry leader Nvidia—but other AI names appear too pricey. Analog/mixed-signal chip valuations are still below our fair value estimates, as near-term automotive and industrial demand is sluggish and inventory levels rise,” noted Morningstar analyst Brian Colello.
He points to an AI/analog chip divide in which shares of the AI names sport premium multiples relative to their analog counterparts. That could create opportunities with analog chip stocks, including SMH holding STMicroelectronics (STM).
“We like ST’s exposure to the secular tailwinds around rising chip content per vehicle. We also think the market is generally too concerned about the excess supply of SiC semis coming online in the years ahead, as well as the likely expansion of Chinese semiconductor competitors. Both trends bear watching, but we think ST has been overly punished to date,” added Colello.
Another undervalued semiconductor also held by SMH is Skyworks Solutions (SWKS). That stock is off 12% over the past year. That’s because there are concerns that marquee customer Apple is looking for ways to reduce its dependence on Skyworks chips. But Colello said those fears are exaggerated.
“We view that assessment as vastly overstated. [That’s because] Skyworks’ products use different materials and have significantly different design expertise than Apple’s internal semiconductors. We believe Skyworks will achieve mid-to-high-single-digit long-term revenue growth as its RF parts will remain essential as more 5G phones enter the market,” concluded the analyst.
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