Two Potentially Undervalued Semiconductor Stocks

Unicorn Portfolio Update 8: #12 of 20 stocks added.

One large-cap, one small-cap, both trading at extremely depressed valuations in an industry facing severe short-term headwinds but also a long secular tailwind. 

Micron

This may not be the most exciting name that we will be adding to the Unicorn Portfolio but sometimes valuation can also create an asymmetrical risk/reward opportunity. Micron supplies memory and storage hardware to the worlds leading tech companies. The bulk of its business consists of selling DRAM and NAND Flash to manufacturers like Apple. Micron is operating in very hot sectors like data centres, automotive and electric vehicles, artificial intelligence and 5G. 

This industry has experienced tremendous consolidation and now operates as an oligopoly, with only three major players in the DRAM market and about six in NAND flash. With so few companies selling memory in large quantities, they collectively have some pricing power and this creates a Moat. 

We have previously stated that semiconductors are the new oil (excluding 2022, where oil is the new oil) and this is even more true for the memory industry which is often analogised to being the commodity of semiconductors. Although your new laptop won't have a sticker on it saying which RAM module you are using, there is a good chance that this critical component is made by Micron.
 

Indie Semiconductor

Indie is developing highly integrated semiconductor and software solutions to create a next-generation automotive platform. If they can achieve this ambitious goal, the stock will soar but they are facing stiff competition and are still largely unproven. Indie operates in four sectors:

• Advanced driver-assistance systems (ADAS) and autonomous driving technologies
• Connectivity
• User experience
• Electrification

Indie is a very small company compared to Micron with a market cap of only $600 Million. This is definitely a more speculative position since the company is still unprofitable. We are going to look past this fact, since the company is still growing at an astonishing triple-digit pace.

Industry Macro Analysis

So why is the market so pessimistic about semiconductor stocks? Semiconductor stocks have a history of being cyclical and our last leg up, might have been a bit extended. There was a severe chip shortage which created tremendous pricing power, this led to unsustainable margin increases. Now we are entering a slowing economy and the chip shortage seems to be easing, indicating that margins have likely peaked. With the industry being down roughly 40% after severe multiple compression, we believe most of this has been priced in. 

But could there be even more downside lurking? Yes, certainly even though we have compensated for the P in P/E ratios, the upcoming E's might give us another leg down. The E will be largely dependent on the severity and duration of the seemingly inevitable recession. Micron released guidance last week and we already saw weakness with a 24% cut in revenue. Interestingly the stock only fell by 3%, the reader can make their own assumptions regarding this share price movement. Micron currently trades at a forward P/E of 6.2.

Portfolio Updates Summary

• Buy $250 MU at $51.99
• Buy $250 INDI at $5.40

Disclosure

This is not financial advice and is only based on the author's opinion. This is not buy or sell recommendations of any stock.  The $10K is not real money and only a demonstration of a typical portfolio. The Unicorn Portfolio is a high-risk portfolio and should always remain a small allocation of your overall assets. This is an actively managed portfolio where we will buy and sell positions as we deem fit without any regard for taxation. Remember, all selling of stocks triggers a tax event in most countries and it is the investors personal responsibility to always remain tax compliant.