Two top-tier chipmakers stand out as must-buys in the new year, while another widely held semiconductor company faces a slew of challenges.
Wall Street and cyclical businesses have had a terrible year. A momentous shift in Federal Reserve monetary policy has driven interest rates skyrocketing to their highest level in decades. As a result, all three major US stock indices have entered a bear market, with the likelihood of a 2023 recession increasing dramatically.
Despite these near-term obstacles, the semiconductor industry’s long-term prognosis remains positive. According to Fortune Business Insights research, the worldwide semiconductor sector is predicted to more than double in size between 2021 and 2029, from $527.9 billion to $1.38 trillion. As a result, chipmakers have the potential to be excellent long-term investments.
Not all chipmakers, however, are made equal. With the bear market in 2022 lowering tech stock prices, two semiconductor stocks stand out as must-buys in 2023. Meanwhile, one of the world’s most popular semis appears to be absolutely avoidable in the new year.
Intel is the number one semiconductor stock to purchase in 2023.
Intel (INTC -0.70%), a Dow Jones Industrial Average component, is the first chipmaker that is a sure bet in 2023.
Inflation and supply chain concerns have taken their toll on Intel in 2022, as they have on most semiconductor businesses. In addition to these worries, Intel’s stock has been dragged down by its primary competitor Advanced Micro Devices (AMD -2.67%), which has been nibbling away at its share of central processing units (CPUs) sold in personal computers, mobile devices, and data center servers. While these are all real challenges, none of them are very serious in the long run or threaten to derail Intel’s turnaround approach.
Let’s start with the elephant in the room. Yes, AMD has been stealing market share from Intel for the past three years. While it would be ideal if Intel did not lose market share to AMD, it is crucial to emphasize that the percentage of the market share lost remains quite small.
According to Mercury Research, AMD held 13.9% of the desktop CPU market and 17.5% of the data center server market in the third quarter. That means Intel still controls more than 80% of these markets. In other words, Intel will continue to profit from these segments.
Intel’s foundry sector is another major growth driver. Earlier this year, the corporation broke ground on two chip-manufacturing factories in Ohio for a total cost of $20 billion. It’s worth remembering that the CHIPS and Science Act was signed into law by President Joe Biden in August. This law gives almost $53 billion in subsidies for manufacturing facilities and various research funds to the semiconductor sector. This surely encourages Intel to increase its domestic production capability.
Finally, don’t underestimate Mobileye Global, an autonomous car firm that Intel purchased for $15.3 billion in 2017. Mobileye went public in late October and now has a market capitalization of $25.5 billion. More importantly, Intel continues to be the primary stakeholder of a firm (Mobileye) that increased sales by 38% in a difficult third quarter.
Intel’s share price has been slashed in half in less than three years, making it ripe for exploitation by opportunistic investors.
Broadcom will be the second most valuable semiconductor stock in 2023.
Broadcom (AVGO 2.57%) is the second semiconductor stock that investors can securely buy in 2023.
Broadcom naysayers tend to be most concerned about the increased risk that a recession will cut semiconductor demand for Broadcom and possibly shrink its backlog. Even if this conclusion occurs, it would be a temporary stumbling block for a corporation with a mountain of catalysts.
Broadcom’s most important driver is the 5G revolution. Wireless download speeds have not much improved over the last decade. However, as telecom firms continue to upgrade their wireless infrastructure, 5G speeds are becoming a reality. This implies that a continuous device update cycle for consumers and enterprises should occur into the mid-decade. Broadcom makes the majority of its money by selling wireless processors and accessories for next-generation smartphones.
Another thing to consider is that owning a smartphone and having a wireless connection has turned into a need. Even a recession is unlikely to result in a major increase in cellphone service cancellations.
Broadcom’s backlog is another plus. According to CEO Hock Tan, the company entered fiscal 2022 (the company’s fiscal year finishes in late October) with a record $14.9 billion in bookings and was booking orders well into 2023. If the US economy slows in the coming year, Broadcom can rely on its backlog to provide anything from 12 to 24 months of very predictable operating cash flow.
Need more reason to be enthusiastic about Broadcom? Take a look at its data center operations. Demand for access and connection chips used in data center servers should rise as more firms move their data to the cloud in the aftermath of the COVID-19 outbreak. This auxiliary operational area has a real possibility of outpacing wireless chip growth in smartphones.
Broadcom will also appeal to income investors. Broadcom’s quarterly payment has increased by about 6,500% to $4.60 since 2010. This equates to a 3.5% return for a fast-growing company that is now priced at only 13 times Wall Street’s expected earnings in 2023.
Nvidia is the semiconductor stock to shun like the plague in 2023.
However, not every semiconductor stock will be a winner. Nvidia (NVDA -0.98%) can be comfortably left on the shelf in 2023, despite being one of the top chipmakers to include in your portfolio for well over a decade.
To be clear, I’m not saying Nvidia is a stock to avoid at all costs. There are undoubtedly catalysts that have contributed to Nvidia’s more than 8,000% gain since the Great Recession’s bottom in March 2009. Nvidia, for instance, controls over 20% of the worldwide graphics processing unit (GPU) market and roughly 80% of discrete graphics cards, which are GPUs that operate independently of the processor. GPUs make for the vast majority of Nvidia’s profits.
However, one of the company’s main problems is that several of its fast-growing areas have reached a brick wall. Cryptocurrency valuations, for example, have plummeted since November 2021. When the value of digital currencies falls, so does the demand for GPUs used to mine bitcoin. Furthermore, non-fungible token (NFT) transactions have plummeted, reducing demand for metaverse innovations and blockchain-based gaming. That’s not great news for the company’s Omniverse Platform.
In the flash of an eye, Nvidia’s gaming division has also gone from boom to bankruptcy. People aren’t spending as much time gaming at home now that the pandemic appears to be in the rearview mirror in a lot of wealthy countries. When combined with a worse US economic forecast, gaming revenue has dropped from $3.62 billion in the company’s fiscal first quarter of 2023 to $1.57 billion in the fiscal third quarter.
Nvidia is also facing challenges in China, the world’s second-largest economy. The United States ordered chipmakers to suspend the shipping of sophisticated microchips to China in September. Although Nvidia has created a slower GPU that complies with the new export requirements, it is unclear whether this slower GPU will make the same revenue as the faster A100 GPU. The potential income loss from China might be enormous.
Finally, Nvidia’s valuation does not adequately account for all of the macroeconomic and company-specific headwinds it faces. Despite reducing its share price since reaching an all-time high on November 22, 2021, Nvidia commands a forward-year price-to-earnings ratio of 40. That’s a lot of money for a corporation that expects no sales growth in fiscal 2023 and possibly high-single-digit revenue growth in fiscal 2024, provided the United States doesn’t experience a recession.
With so many other fantastic buys in the tech field to pick from, Nvidia becomes an easy semiconductor stock to ignore in 2023.
For More Stock Related News, Click Here.
