Nvidia NVDA stock has been undeniably hot this year. The semiconductor industry has been very strong as well, but NVDA has dramatically outperformed the chip industry and the broader market.
Nvidia is a great company, with diverse products, and a very promising future, but the valuation has gotten completely out of hand.
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Nvidia stock is trading at nearly 100x its TTM earnings, double its five-year median of 55x, and triple the industry average of 32x. The last time NVDA traded at a 100x multiple, which wasn’t very long ago, the stock traded down -60% over the following six months.
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The semiconductor industry has a tendency to trade cyclically, leading economic booms and busts. NVDA is one of the strongest names in the industry because it is a household name, has benefitted massively from the gaming industry, as well as the cloud, and hypes up its AI capabilities. All of this is true, but at a certain point investors have to look for more reasonably valued companies.
So how do you gain more rational access to the semiconductor industry, which is likely to boom again thanks to the new AI revolution? Even with the strength the semiconductor industry has experienced this year, there are still several companies with very reasonable valuations. Furthermore, the Zacks Rank has helped identified three semi stocks with positively trending earnings revisions.
Microchip Technology
Microchip Technology MCHP develops, manufactures, and sells smart, connected, and secure embedded control solutions in the Americas, Europe, and Asia. MCHP has a comprehensive product portfolio serving over 120,000 customers across the industrial, automotive, aerospace and defense, communications, and computing industries.
MCHP boasts a Zacks Rank #1 (Strong Buy), indicating upward trending earnings revisions. Current quarter sales are expected to grow 20% to $2.2 billion, and earnings are projected to grow 19% to $1.61 per share over the same period. Full-year sales are expected to be $8.4 billion, a 24% YoY increase, while earnings are expected to climb 30% to $5.99 per share.
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Analysts are in near unanimous agreement in upgrading MCHP’s earnings estimates over the last two months.
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Microchip Technology is trading at a one-year forward earnings multiple of 14x, below its five-year median of 17x, and below the industry average of 18x. MCHP also offers a dividend yield of 1.8%, which it increased 40% over the last year.
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Analog Devices
Analog Devices ADI designs, manufactures, tests, and markets integrated circuits, software, and subsystems that leverage analog, mixed-signal, and digital signal processing technologies. ADI produces a range of products and serves the industrial, consumer, communications, and automotive markets.
Analog Devices currently earns a Zacks Rank #2 (Buy), indicating upward trending earnings revisions. ADI has had its earnings expectations upgraded across all timeframes, with the current year earnings revised 8% higher over the last 60 days.
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ADI has been a steady earner, and the stock has grinded higher consistently for the last decade. Over the last 10 years ADI has almost doubled the returns of the S&P 500.
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Analog Devices stock is trading at a one-year forward earnings multiple of 17x, below its 10-year median of 21x, and less the one quarter of NVDA’s 76x multiple. ADM also offers a dividend of 1.9%, which it has increased by an average of 12% over the last five years.
ASE Technology
ASE Technology ASX is a provider of semiconductor manufacturing services in assembly and testing. ASX develops and offers complete turnkey solutions in the manufacturing and testing of semiconductor components and employs 95,000 people with facilities across the world.
ASX has a Zacks Rank #2 (Buy), indicating a positive earnings revision trend. During its last earnings report, ASX EPS surprised to the upside by 10%.
ASE Technology is trading at a very reasonable valuation as well. Its one-year forward earnings multiple is 9x, below its 10-year median of 13x, and below the industry average of 19x. ASX also has a dividend yield of 4.9%.
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Bottom Line
The semiconductor industry is a complex and fascinating one. The products these companies make are absolute essentials in our increasingly digital lifestyles. While stocks like NVDA have been hyped to the moon over the last few months, looking below the surface investors can find much more appealing stocks.
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Analog Devices, Inc. (ADI) : Free Stock Analysis Report
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