2 Semiconductor Stocks Worth Considering

The Morningstar Global Semiconductors Index is up 53.07% for the year to date as of September 17, 2024, but Lee still sees two semiconductor stocks that remain undervalued relative to their fair value:

• Taiwan Semiconductor Manufacturing TSM
• Global Wafers 6488

“Good buys still exist after a year of AI fever,” he says.

A list of semiconductor manufacturing stocks covered by Morningstar can be found at the bottom of this article.

Cyclical trends are still critical for semiconductor stocks

Even with the AI ​​boom, Lee notes the importance of cyclical production and demand trends when it comes to semiconductor stocks and the benefits that economic moats provide when it comes to gross margins and capacity utilization.

While manufacturers are increasing investment, the level should be manageable, Lee says.

On the supply side, “semiconductor manufacturers are more optimistic than last quarter, highlighted by higher capital spending prospects and pipeline capacity,” he says. “We see modest risks of overcapacity in memory as capacity growth is only 5% in 2025.”

Despite fears that manufacturers may be overly optimistic about spending, Lee believes the risks will be concentrated in Chinese foundries. “We believe the risks will be concentrated in Chinese foundries because they are built on the premise of import substitution and locally designed chips,” he says.

Demand for semiconductors is expected to be tight

Lee anticipates an improved demand picture from automakers and consumers, with AI providing a “tailwind.”

“We believe the current climate of tepid capex and recovering semiconductor exports indicates that manufacturers are restocking for new product launches, but have not regained enough confidence to embark on the next major wave of expansion,” he says Lee.

Lee expects a more significant recovery in demand by 2025. “On the demand side, we expect general PC and server orders to improve in 2025 as demand for AI-based replacement increases,” he says he.

A best quality investment approach

Taiwan Semiconductor Manufacturing Co. is the dominant foundry with broad exposure to AI, Lee says. “TSMC is a major beneficiary of AI because it has a dominant share of high-end manufacturing,” says Lee.

On the other hand, GlobalWafers is distinguished by its effective cost control and its monopoly in the US market, thanks to its investment in a new 300 mm wafer factory in Texas.

“It is the only 300mm wafer fab in the US capable of supplying wafers for high-end processes,” adds Lee. “This means GlobalWafers will enjoy a monopoly for four to five years, even if competitors decide to set up factories in the US.”

Here’s a closer look at Morningstar’s picks for semiconductor stocks.

Taiwan Semiconductor Manufacturing

• Estimated fair value: $213
• Morningstar rating: 4 stars
• Morningstar Economic Moat Rating: Lat
• Morningstar Uncertainty Rating: Medium

“TSMC is a major beneficiary of AI as it holds a dominant share of high-end contract manufacturing. It is immune to changes between cloud AI and peak AI, as players from both groups rely on TSMC’s supply. We believe TSMC’s average selling price will benefit from higher demand on the latest processes and volume will benefit from larger chips to ensure AI functions on both servers and devices run smoothly.

“We believe geopolitical concerns are overblown as TSMC builds new sites in Japan, Germany and the US. Capital spending in overseas factories is higher than in Taiwan, but most of the increase is covered by government subsidies. TSMC said its customers are willing to pay more to offset higher operating costs.

“The stock trades at 17x 2025 P/E, which we consider undervalued given TSMC’s dominant position and strong earnings per share growth over the next two years.”

Read more about Phelix Lee’s Analyst Report here.

Global Wafers

• Estimated fair value: TWD 620
• Morningstar rating: 4 stars
• Morningstar Economic Moat Rating: Narrow
• Morningstar Uncertainty Rating: High

“GlobalWafers is a recovery play benefiting from increased demand for silicon wafers due to global expansions. Wafer manufacturers’ performance lags that of their customers by about two-quarters because customers only supply when the market is booming. We expect sentiment to improve as electric vehicles, industry and other non-AI applications recover in the second half of 2024.

“GlobalWafers is building a new 300mm wafer fab in Texas with customers such as Intel INTC and Texas Instruments TXN. It is the first new 300mm wafer fab in the US and probably the only one that can supply wafers used in cutting edge processes. This means GlobalWafers will enjoy a monopoly for four to five years, even if competitors change their minds and set up factories in the US.

“The stock trades at 16x 2025 P/E, which we believe is undervalued as sentiment is near the bottom line and the company is more successful in managing rising labor and energy costs.”

Read more about Phelix Lee’s Analyst Report here.

The following are semiconductor stocks covered by Morningstar analysts: