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2 Beaten Down Semiconductor Stocks to Buy and Hold for the Long-term

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Semiconductors, also referred to as semis or chips, are essential components in the modern electrical devices we use every day.  Anything that is computerized, such as smartphones, laptops, televisions, washing machines, air conditioners, cars, airplanes, and medical devices, are dependent on semiconductors. 

The industry has grown rapidly and analysts expect that this momentum will continue. According to Fortune Business Insights, the industry generated more than $420 billion in 2020 and is expected to reach more than $800 billion in 2028. 

The semiconductor industry, represented by the iShares Semiconductor ETF (SOXX), has jumped more than 20% this year. However, the ongoing chip shortage has had some far reaching ramifications and has caused many smartphone manufacturers to cut their production outlook

In this article, I will look at two semiconductor laggards, Qualcomm (QCOM) and Micron Technologies (MU), that I believe offer the best buying opportunities for long-term investors.

Qualcomm 

Qualcomm is a large semiconductor company that focuses on building products for the wireless industry. The company is best known for its Snapdragon chips that power most smartphones. The firm operates in three segments: QCT, QTL, and QSI

Qualcomm CDMA Technologies (QCT), which manufactures products like Snapdragon, accounts for about 70% of total revenue. Qualcomm Technology Licensing (QTL), on the other hand, provides intellectual property to companies that use its technology. Finally, Qualcomm Strategic Initiatives (QSI) is the venture arm of the company that invests in companies in industries like artificial intelligence and machine learning.

Qualcomm’s stock price has underperformed significantly this year. After soaring to $165 in February, it has crashed by more than 20%, entering into bear territory.

Still, there are a few reasons why Qualcomm is a good investment. First, while Qualcomm faces significant competition from Mediatek, it still has a strong competitive advantage. For one, it has a strong competitive advantage in industries like 5G and IoT. This has seen its revenue soar from $22 billion in 2017 to more than $32 billion in the trailing 12 months. 

Moreover, the company offers strong shareholder returns. It offers a 2% dividend yield and the management is taking actions to remedy the weak share price. For example, they recently announced a $10 billion share buyback program. This program will top about $0.9 billion in the previous program. 

In addition, analysts are generally positive about the stock price. Canaccord Genuity expect that the shares will rise to $225 while those at Cowen see it rising to $180. The average estimate on Wall Street for the stock is $176.54, which is much higher than the current price.

Finally, the company’s recent acquisition of Veoneer in a $4.5 billion deal could lead to strong performance as the autonomous mobility industry grows. 

Micron Technology

Micron is a semiconductor company that provides memory and storage solutions that provide the foundation of some of the fast-growing industries like artificial intelligence (AI), 5G, and data centers. Its products include DRAM, NAND, solid-state storage solutions, and graphics and high memory products.

The Micron stock price has lagged the market this year. It has dropped by more than 30% from its year-to-date high. This price action is mostly because of a combination of factors. For example, while the company’s revenue and EPS have beaten consensus estimates in the past 12 straight quarters, the management gave a soft outlook in the previous quarter.

There are also concerns about the ongoing supply bottlenecks and the fact that the company could have declining demand from chip buyers and pricing pressures. The same concerns were shared by analysts at Bank of America, who expect that DRAM will have pricing challenges. 

Still, the current drop presents a strong buying opportunity for Micron. For one, the company’s management is executing well and free cash flows are growing. The company is also a major player in industries seeing strong growth like 5G, cloud computing and gaming. 

It also expects to return cash to shareholders through dividends as the firm has initiated paying quarterly dividends, which is expected to grow since it has more liquidity than it needs. Another thing that could push the Micron stock price higher is the relatively cheap valuation. 

The company has a forward PE ratio of 7.82x, which is lower than the S&P 500 and semiconductor average. This is notable since the firm has an EBITDA forward growth of about 34%. 

Analysts are also bullish on the stock, with those at Susquehanna Securities expecting it to rise to $125. The highest price target for the stock is about $165, according to TipRanks.

The Bottom Line

The semiconductor industry is expected to record strong growth in the coming years and despite the global chip shortage is expected to see demand outpace supply. I expect that the Micron and Qualcomm stocks will ultimately bounce back when companies are able to overcome these supply bottlenecks. 

The two companies have a strong market share and they will benefit as the sector grows. Qualcomm is also boosting its shareholder returns through dividends and a new buyback program that will reduce the share count and boost earnings per share. Micron has also started paying dividends and the management has committed to introducing buybacks.

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Crispus Nyaga

Crispus Nyaga is a financial analyst and trader with almost a decade of experience in the industry. He graduated with a BSc degree in 2013 and an MBA in 2017. He has published in leading financial publications like InvestingCube, Bankless Times, Invezz, and Seeking Alpha. He focuses mostly on American and European equities, cryptocurrencies, commodities, and currencies. He is an avid golf and Formula 1 fan.

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