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3 Overlooked Semiconductor Stocks With 17% to 51% Upside Potential
The semiconductor industry is growing rapidly in 2024, with sales expected to hit $617 billion — a 16.6% jump from last year. After an uneven 2023, this bounce-back is a welcome change, highlighted by April's $46.4 billion in global sales - a 15.8% rise from the previous year. The exploding demand for artificial intelligence (AI) applications, coupled with expansions in the automotive and data center industries, is fueling this resurgence. With inventories normalizing and demand on the rise, now is a prime time for investors to consider some under-the-radar semiconductor stocks with significant upside potential.
Silicon Motion Technology (SIMO), SMART Global Holdings (SGH), and Tower Semiconductor (TSEM) might not have the same name recognition as Nvidia (NVDA) with your average investor. Still, these stocks are strategically positioned to ride the industry's growth wave, offering upside potential between 17% and 51%, according to Wall Street's forecasts.
As the semiconductor industry embarks on its next wave of growth, these low-profile stocks could be smart picks to add exposure to this dynamic market. Let's dive into their prospects.
#1. Silicon Motion Technology Corporation
Silicon Motion Technology Corporation (SIMO) is a top player in developing NAND flash controllers for solid-state storage devices. They design and market controllers for SSDs, eMMCs, and other flash memory products, used in everything from mobile devices to data centers.
SIMO stock has pulled back 25% from its June highs, but the shares are still up 17.3% over the past 52 weeks - providing investors with an opportunity to buy the dip.
SIMO looks reasonably valued, with a market cap of $2.15 billion and a forward price/earnings (P/E) ratio of 18.37, which is a discount to the tech sector median. The stock also offers a 3.13% annual dividend yield, based on the quarterly dividend of $0.50 per share.
Silicon Motion recently reported a strong Q2 2024, with net sales up to $210.7 million and net income rising to $30.8 million, or $0.91 per diluted ADS. For 2024, management expects revenue between $800 million and $830 million, indicating 25% to 30% year-over-year growth. This optimistic forecast is backed by strong client demand and a more comprehensive product portfolio.
The company recently launched two big products: the SM2508, a power-efficient PCIe Gen5 NVMe 2.0 client SSD controller for AI PCs and gaming consoles, and the SM2322, a high-performance solution for external portable SSDs. These innovations position SIMO well in the evolving AI and high-performance computing markets.
Analysts are bullish on SIMO, with 7 out of 9 recommending a “strong buy” and the remaining 2 suggesting a “moderate buy.” The mean target price of $88.33 suggests a potential upside of 38.3% from current levels.
#2. SMART Global Holdings, Inc.
SMART Global Holdings, Inc. (SGH) is a global leader in specialty memory, storage, and hybrid solutions. For over 30 years, it has served the electronics industry with standard and custom products.
SGH stock has been volatile over the past year, down 8.7% in the last 52 weeks. However, the shares have muscled their way to a gain of roughly 12% so far in 2024.
With a market cap of $1.11 billion, SGH is a component of the S&P SmallCap 600 Index ($IQY) and the Russell 2000 Index (RUT), two major small-cap stock benchmarks. Valued at 16.46x forward adjusted earnings and 0.94x sales, the semiconductor stock is priced at a discount to its sector peers.
In the third quarter of 2024, SGH reported net sales of $300.6 million, up 5.5% from the previous quarter. GAAP gross margin improved to 29.6% from 28.8%, while non-GAAP gross margin rose to 32.3% from 31.5%. Non-GAAP EPS increased 37% quarter-over-quarter to $0.37, comfortably beating Wall Street's estimates.
For the fourth quarter, SGH expects net sales of $325 million, a gross margin of 29.5%, and diluted earnings per share of $0.25 to $0.55, in line with consensus estimates.
SGH recently launched a new line of DDR5 Registered DIMMs with conformal coating for liquid immersion servers, combining superior performance with enhanced protection for demanding data center environments. The company also received a $200 million preferred equity investment from SK Telecom to enhance its capabilities and expand its end-to-end AI factory offerings.
Analysts are bullish on SGH, with 3 out of 4 analysts suggesting a “strong buy” and 1 recommending a “moderate buy.” The mean target price of $32.25 implies a potential upside of 51.8% from current levels.
#3. Tower Semiconductor Ltd.
Tower Semiconductor Ltd. (TSEM) is a top global specialty foundry that provides advanced analog semiconductor solutions for various applications, including consumer, industrial, automotive, mobile, infrastructure, medical, and aerospace and defense.
TSEM stock has gained just over 30% on a YTD basis, lifting its 52-week return to 29.9%.
With a market cap of $4.37 billion, mid-cap TSEM is still reasonably valued, with a forward P/E ratio of 19.31 arriving below the tech sector median.
The company reported strong Q2 2024 results, with revenue of $351 million up from $327 million in the previous quarter. Gross profit increased to $87 million, while operating profit reached $55 million, including a $6 million restructuring income.
Net profit for the quarter was $53 million, or $0.48 per share. On an adjusted basis, TSEM earned $0.53 per share.
Looking ahead, the company guided revenue for the third quarter to be $370 million, plus or minus 5%, indicating expectations for both year-over-year and quarter-over-quarter growth.
Earlier this year, TSEM announced a strategic cooperation with Tianyi Micro to develop next-generation OLED micro displays for the growing AR/VR market. This collaboration leverages Tower's unique 180nm and 65nm dedicated micro display backplane process flows, addressing the increasing demand for advanced AR/VR solutions in China and globally.
Analysts maintain a strong bullish stance on TSEM, with all three experts in coverage calling the stock a “strong buy.” The mean target price of $46.75 implies a potential upside of 17.4% from the current price.
Conclusion
In conclusion, while these three semiconductor stocks - Silicon Motion Technology (SIMO), SMART Global Holdings (SGH), and Tower Semiconductor (TSEM) - may not be the highest-profile names in the industry, they're definitely worth keeping an eye on. With “strong buy” consensus ratings from analysts and some serious upside potential (we're talking 17-51%!), these hidden chip gems are worth a closer look for investors interested in adding strategic semiconductor exposure to their portfolios.
On the date of publication, Ebube Jones did not have (either directly or indirectly) positions in any of the securities mentioned in this article. All information and data in this article is solely for informational purposes. For more information please view the Barchart Disclosure Policy here.
