After being one of the strongest parts of the market for more than a decade, semiconductors have been in the midst of a brutal selloff. YTD, the VanEck Semiconductors ETF (SMH) is down 32% which is more than double the S&P 500’s YTD loss of 15%.

Although the near-term outlook remains cloudy, investors should consider using this weakness to increase exposure, especially for those semiconductor companies showing evidence of earnings growth and margin expansion. 

Industries like cloud computing, autonomous driving, and AI continue to expand regardless of near-term road bumps. Companies selling to these industries will also prosper. Therefore, investors should target high-quality semiconductor stocks like Micron Computers (MU), ON Semiconductor (ON), and Broadcom (AVGO).

Micron Computers (MU)

MU is a leading maker of DRAM and NAND memory chips. Memory chips are integral for all sorts of consumer tech like smartphones, PCs, cameras, and consoles. However, enterprise demand is exploding as they are also increasingly used in cars and data centers. Additionally, there is strong demand for futuristic tech like AI and autonomous driving which bodes well for the company’s growth prospects. 

This dynamic is represented in Micron’s recent earnings report which showed a slowing in consumer tech but continued growth in enterprise spending. Over the next year, it’s forecasted DRAM demand to grow in the teens and NAND demand to grow by 30%. 

Last quarter, MU’s data center business saw 60% revenue growth. MU’s automotive segment also offers growth upside, and it currently has 50% of the automotive memory market. Cars are increasingly becoming electronic, and many of these require memory. 

In terms of value, MU also shines with a forward P/E of 5.9. The company also has above-average 29% profit margins which should persist given the company’s falling per-unit costs with increased production and strong demand, leading to pricing power.

MU has a B rating according to the POWR Ratings which translates to a Buy. B-rated stocks have posted an average annual performance of 21.1% which compares favorably to the S&P 500’s annual gain of 8.0%. MU is ranked #12 in the B-rated Semiconductor & Wireless Chip group out of #12. Click here to see the other top stocks in the sector and here to see MU’s complete POWR Ratings. 

ON Semiconductor (ON)

ON designs and builds intelligent sensing and power technologies for its customers in the automotive, telecom, aerospace, and medical industries.

A major reason that ON should be on the radar of investors, interested in under-the-radar growth opportunities, is that it provides exposure to the electric vehicle (EV)  and AV industry. ON Semiconductor supplies a variety of products, including silicon carbide-based power modules for acceleration, inverters, LiDAR (remote sensing technology), chargers, body electronics, and the powertrain.

Currently, the company expects automotive revenue to grow at a 17% annual rate over the next three years. This growth should persist well into the decade as EVs are projected to outsell gas-powered vehicles by 2028, according to Credit Suisse. Essentially, ON is a major producer of chips that are integral for these new technologies.

The company’s other major segments are also doing well due to strength in end-markets like 5G, cloud computing, power generation, and factory automation. 

ON’s combination of value and growth makes it a great ‘buy the dip’ candidate in this bear market. Historically, the stock’s forward P/E has vacillated between 20 and 30, but it currently has a foward P/E of 11.5. 

ON Semiconductor has an overall B rating in the POWR Ratings system, translating to a Buy. B-rated stocks have posted an average annual return of 21.0% since 1999, which compares favorably to the S&P 500’s average annual gain of 8%. Check out ON’s complete POWR Ratings breakdown, including component grades for growth, sentiment, and momentum, here.

Broadcom (AVGO)

AVGO is a semiconductor and infrastructure software company based in San Jose, California. The company’s chips are found in all sorts of products and devices including iPhones, computers, and networking equipment. 

The company has been a major beneficiary of recent trends in tech like cloud computing, 5G, and data centers. The company’s infrastructure software is used to manage data centers and has been a recent growth driver for the company. Growth in this segment is also one reason that the company’s margins have expanded from 13.5% to 34.1% over the last 5 years. 

The combination of margin expansion and revenue growth is quite potent for AVGO’s bottom line. This was evident in its last earnings report which showed 16% revenue growth and EPS growth of 79%. And unlike many tech companies which are experiencing a sharp slowdown as the economy returns to normal, AVGO is expected to continue delivering double-digit earnings and revenue growth over the next couple of years.

The major factor is that enterprise tech spending continues to be strong. For the full year, analysts are forecasting $35.52 in EPS and $32 billion in revenue which equates to growth of 27% and 16%, respectively. 

AVGO’s POWR Ratings are consistent with its strong earnings outlook and leadership in important categories. The company has an overall A rating, which translates to Strong Buy in our proprietary ratings system. A-rated stocks have posted an average annual performance of 31.1% which handily beats the S&P 500’s 8.0% average annual gain over the same period. 

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AVGO shares were trading at $501.32 per share on Wednesday morning, up $3.12 (+0.63%). Year-to-date, AVGO has declined -23.52%, versus a -16.88% rise in the benchmark S&P 500 index during the same period.

About the Author: Jaimini Desai

Jaimini Desai has been a financial writer and reporter for nearly a decade. His goal is to help readers identify risks and opportunities in the markets. He is the Chief Growth Strategist for StockNews.com and the editor of the POWR Growth and POWR Stocks Under $10 newsletters. Learn more about Jaimini’s background, along with links to his most recent articles. More...

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