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2 Semiconductor Stocks to Buy with Reasonable Valuations

The semiconductor industry is one of the strongest sectors in the market YTD. In the chart below we can see just how much the Semiconductor ETF SMH has outperformed the S&P 500 ETF SPY.

But the rally has forced individual chip stocks to trade up to extreme valuations. Nvidia NVDA for instance, is trading at an unfathomably high 105x earnings. While it is an exceptional company and stock, that is far too rich for most investors.

Fortunately, there are still some chip stocks that are trading at reasonable valuations. Using the Zacks Rank I have identified two very compelling semiconductor stocks.

Zacks Investment Research
Zacks Investment Research

Image Source: Zacks Investment Research

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Microchip Technology

Microchip Technology MCHP develops, manufactures, and sells smart, connected, and secure embedded control solutions in the Americas, Europe, and Asia. MCHP has a comprehensive product portfolio serving over 120,000 customers across the industrial, automotive, aerospace and defense, communications, and computing industries.

MCHP boasts a Zacks Rank #1 (Strong Buy), indicating upward trending earnings revisions. Current quarter sales are expected to grow 20% to $2.2 billion, and earnings are projected to grow 19% to $1.61 per share over the same period. Full-year sales are expected to be $8.4 billion, a 24% YoY increase, while earnings are expected to climb 30% to $5.99 per share.

Zacks Investment Research
Zacks Investment Research


Image Source: Zacks Investment Research

Analysts are in near unanimous agreement in upgrading MCHP’s earnings estimates over the last two months. Earnings expectations have been revised higher by as much as 11%.

Zacks Investment Research
Zacks Investment Research


Image Source: Zacks Investment Research

Additionally, the price chart of MCHP has built out a very convincing bullish technical chart pattern. The price action has carved out an 18-month consolidation, and cup and handle pattern. The handle portion of the setup offers a fantastic risk-reward trade. A breakout above $84 should push the stock to new all-time highs. Alternatively, below $79 the pattern is invalidated.

TradingView
TradingView


Image Source: TradingView

Microchip Technology is trading at a one-year forward earnings multiple of 14x, below its five-year median of 17x, and below the industry average of 18x. MCHP also offers a dividend yield of 1.8%. Management has raised the dividend payment by 40% over the last year.

Zacks Investment Research
Zacks Investment Research


Image Source: Zacks Investment Research

ASE Technology

ASE Technology ASX is a provider of semiconductor manufacturing services in assembly and testing. ASX develops and offers complete turnkey solutions in the manufacturing and testing of semiconductor components and employs 95,000 people with facilities across the world.

ASX has a Zacks Rank #1 (Buy), indicating a positive earnings revision trend. During its last earnings report, ASX EPS surprised to the upside by 10%.

ASE Technology stock is showing an interesting technical setup as well. This week the stock broke out of an 8-week bull flag consolidation. The breakout above $7.50 per share triggered the buy signal, now so long as it doesn’t trade back below the breakout level, ASX should move towards $8.50.

TradingView
TradingView


Image Source: TradingView

ASX was able to weather the 2022 technology correction decently, and has made a strong comeback this year. It has now outperformed the broad market over the last two years.

Zacks Investment Research
Zacks Investment Research


Image Source: Zacks Investment Research

ASE Technology is trading at a very reasonable valuation as well. Its one-year forward earnings multiple is 9x, which is below its 10-year median of 13x, and below the industry average of 20x. ASX also has a dividend yield of 4.9%.

Zacks Investment Research
Zacks Investment Research


Image Source: Zacks Investment Research

Conclusion

The semiconductor industry plays a critical role in the broader technological-enabled economy. Without these microchips many of the products we use every day would not exist.

Want the latest recommendations from Zacks Investment Research? Today, you can download 7 Best Stocks for the Next 30 Days. Click to get this free report

NVIDIA Corporation (NVDA) : Free Stock Analysis Report

Microchip Technology Incorporated (MCHP) : Free Stock Analysis Report

SPDR S&P 500 ETF (SPY): ETF Research Reports

ASE Technology Holding Co., Ltd. (ASX) : Free Stock Analysis Report

VanEck Semiconductor ETF (SMH): ETF Research Reports

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Zacks Investment Research