4 Top Semiconductor Stock Picks
While valuations are stretched for some of these stocks, opportunities remain.
Demand for semiconductor chips for data centers is full steam ahead, thanks to the artificial intelligence boom. For investors, the massive rally in some semiconductor stocks means treading carefully when putting new money to work in the group. However, with secular tailwinds continuing for non-AI chips and valuations more reasonable outside the digital chip space, opportunities exist for long-term investors to fund cheap chip stocks.
Still, AI remains the driver for the most high-profile names. “We continue to see a historic rise in demand for artificial intelligence accelerators, led by Nvidia’s data center graphics processing units,” says Morningstar technology equity strategist Brian Colello. Despite doubt over whether aggressive investment in AI is justified by its revenue, “we remain optimistic that demand will continue to exceed chip supply through the rest of 2024 and, most likely, much of 2025. We’ve heard various concerns about whether AI revenue justifies this massive investment. Yet, none of the AI industry leaders are slowing their investments as they recognize the importance of this new technology.”
Colello points to four undervalued semiconductor stocks as Morningstar’s top picks:
Away from the AI trend, Colello sees a near-term recovery in industrial chip demand, the strength of which could be closely tied to the global economy. Meanwhile, the downturn continues in the automotive chip cycle, but it appears to be less severe, thanks to the rise of electric vehicles and the increased use of chips in them. But more broadly, “secular tailwinds in chip content going into cars and industrial equipment remain intact,” Colello explains.
Semiconductor Stock Valuations
Even after a historic run, the semiconductor industry remains “6% undervalued on a median price/fair value estimate basis as of Sept. 26,” according to Colello. However, there are notable disparities between the categories. While the median analog/mixed-signal chip company is 17% undervalued, digital chipmaker stocks are 12% overvalued, highlighting a less-than-ideal risk/reward ratio and the lack of safety margins in the industry.
The Median Digital Stock Is 12% Overvalued, but Analog Is 17% Undervalued
The Outlook for Nvidia
In what Colello calls a once-in-a-generation AI “Gold Rush,” Nvidia NVDA has established itself as the dominant player, led by its data center GPU business. The firm’s revenue here saw an impressive fivefold increase from $3 billion in 2019 to 2022, then tripled in 2023.
The growth isn’t slowing anytime soon. “We expect it to more than double in 2024 to $112 billion,” says Colello, accomplishing a “greater than 30 times increase in just six years.” Based on the massive inflow of investments in AI and supply constraints, Colello expects to see few signs of slowdowns in spending.
With Nvidia’s new Blackwell products coming to market, Colello says Nvidia’s GPU revenue appears to be locked in for all of 2024 and most of 2025. “We still anticipate that Nvidia will remain supply-constrained for the next four to six quarters, which provides little downside to near-term results and likely supports the stock price.” Nvidia stock is up 188% over the last 12 months.
Nvidia’s Dominance in AI Should Continue in 2024 and Even 2025
Gross Margins Matter for Semis
Colello believes gross margins continue to be a telling sign of the successes and failures in the CPU and GPU markets. Nvidia’s wide moat is on full display, as its “gross margin progress has been unparalleled,” he says. “The company is extracting tremendous pricing power on its data center products, reaching gross margins as high as 78%. GMs may dip slightly at the end of 2024 (we estimate 73% in the fourth quarter) as new Blackwell products (which might be costlier to build) come out, but we don’t anticipate any free fall.”
On the other hand, “AMD’s AMD gross margins should continue to benefit from a recovery in PC demand … [but] the embedded chip revenue [is facing] headwinds from the telecom market.” Meanwhile, Intel’s INTC gross margins tumbled in recent years due to internal struggles with manufacturing and cost management.
Gross Margins Tell the Story of Digital Semis in the Past Few Years With Nvidia’s Rise and Intel’s Fall
Top 4 Semiconductor Stocks
Here’s a closer look at Colello’s recommendations.
Infineon Technologies
- Fair Value Estimate: $54.00
- Morningstar Rating: 4 stars
- Morningstar Economic Moat Rating: Narrow
- Morningstar Uncertainty Rating: High
“Infineon is one of our top picks in the analog and mixed-signal chip space. We’re particularly bullish about the company’s opportunities in automotive semis, which make up over 40% of revenue. Infineon is the worldwide leader in power semis, and given the electrification of the car and the rise of electric vehicles, the company should be well-positioned to aid in automotive powertrain development over the next decade, including the adoption of silicon carbide-based semis. We anticipate nice SiC adoption in its industrial segment as well, aiding in the rollout of renewable energy products, power infrastructure, and industrial automation products.”
Read more of Brian Colello’s analyst note.
STMicroelectronics
- Fair Value Estimate: $52.00
- Morningstar Rating: 5 stars
- Morningstar Economic Moat Rating: Narrow
- Morningstar Uncertainty Rating: High
“STMicroelectronics is one of our top picks in the analog and mixed-signal chip space. The company has healthy exposure to the automotive market with leadership in silicon-carbide-based semis, thanks to its strong partnership with Tesla and rising content in EVs with other carmakers. ST has also fared well in microcontrollers in recent years across a wide array of customers and end markets. 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.”
Read more of Brian Colello’s analyst note.
ON Semiconductor
- Fair Value Estimate: $86.00
- Morningstar Rating: 4 stars
- Morningstar Economic Moat Rating: Narrow
- Morningstar Uncertainty Rating: High
“We expect Onsemi to outpace the growth of its underlying markets over the next five years as it tailors its portfolio of chips and sensors to pursue secular trends toward electrification and connectivity that allow it to sell into new sockets. Specifically, Onsemi is the top supplier of image sensors for automotive applications like advanced driver-assist systems, and its semiconductors enable power management and conversion in electric vehicles and renewable energy—all of which we expect to keep Onsemi’s sales growth above that of the broader semiconductor industry.”
Read more of Wiliam Kerwin’s analyst note.
NXP Semiconductors
- Fair Value Estimate: $320.00
- Morningstar Rating: 4 stars
- Morningstar Economic Moat Rating: Wide
- Morningstar Uncertainty Rating: Medium
“NXP Semiconductors is one of our top picks in the analog and mixed-signal chip space. We’re especially fond of the company’s outsize exposure to the automotive end market, where it obtains nearly 50% of revenue. NXP is well diversified in automotive with a nice product portfolio of processors, microcontrollers, and analog parts. We think the firm will gain its fair share in electrification and safety automotive products too, such as radar and battery management systems. Overall, NXP’s auto business is well tied to the secular tailwinds around rising chip content per vehicle and we think the market is too focused on a near-term slowdown in demand.”
Read more of Brian Colello’s analyst note.
Buying Opportunities in Analog/Mixed Signal and Power Semis
The author or authors do not own shares in any securities mentioned in this article. Find out about Morningstar’s editorial policies.
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