The semiconductor industry is poised for massive growth, but names like Nvidia (NASDAQ:NVDA) and AMD (NASDAQ:AMD) have already seen their share prices surge. For investors looking to capitalize on the semiconductor boom, the key is finding the hidden gems. These are the under-the-radar players whose innovative technologies position them for multi-bagger returns.
The growth drivers for this sector are clear. Cutting-edge technologies like artificial intelligence, 5G, cloud computing, and the Internet of Things are all chip-intensive. As these transformative innovations go mainstream, demand for advanced semiconductors will skyrocket. At the same time, a global chip shortage has highlighted the need for more domestic production capacity. Government initiatives like the CHIPS Act will also unlock billions in funding to build new foundries and expand manufacturing.
With that in mind, the long-term outlook for chip makers is very bullish, but the semiconductor space remains turbulent in the near-term. Savvy investors should embrace these dips as opportunities to grab shares of great companies at a discount. Here are the three stocks I’m talking about.
IPG Photonics (IPGP)
Laser maker IPG Photonics (NASDAQ:IPGP) has seen its stock tumble over 60% from its February 2021 peak to around $100 per share currently. The company has faced declining sales this year amid inventory adjustments and project delays impacting its industrial customer base. However, the negativity seems overdone, and IPGP stock now looks attractively-valued for long-term investors.
That’s because after revenue declined an estimated 6.4% this year, analysts expect IPG Photonics to deliver double-digit revenue growth over the next two years as secular tailwinds in materials processing applications kick in. The consensus estimates call for 10.5% revenue growth in 2024 to $1.5 billion and 13.4% growth in 2025 to $1.7 billion. Meanwhile, earnings are projected to rebound strongly, increasing 35% over that timeframe.
I believe this growth should drive a higher valuation. IPGP trades at just 21-times forward earnings, near multi-year lows. The consensus analyst price target of $130.50 implies almost 30% upside potential over the next 12 months. With improving sales and profit momentum, IPGP appears well-positioned to regain lost ground.
Siltronic AG (SSLLF)
German wafer manufacturer Siltronic (OTCMKTS:SSLLF) has also been through the wringer, with its stock tumbling from around $175 in early 2021 to a low of $54 in October 2022. However, the tide seems to be turning. SSLLF stock has crept up over the past few months to above $80 currently. I believe the recovery rally has legs to $130, which Gurufocus estimates as the stock’s fair value. Gurufocus also estimates this fair value number to hit nearly $200 by the end of 2026.
Meanwhile, Siltronic has benefited from the inventory correction running its course, and expects demand to improve starting in 2024. Of course, revenue is on a downtrend right now, and analysts believe year-end sales decline will hit 16.62%. However, they also believe revenue will rebound and deliver double-digit growth for at least the next three years. In addition, the company invests heavily in capacity expansions that should drive strong growth in outer years. Consensus estimates see revenues almost doubling from $1.6 billion in 2023 to $3 billion by the end of 2031.
Despite these growth prospects, SSLLF stock trades at just 7-times forward earnings, a bargain valuation. The stock also pays a dividend yielding nearly 4%. Patient investors buying at current levels can generate substantial returns as the industry continues to grow.
Taiwan Semiconductor (TSM)
Taiwan Semiconductor (NYSE:TSM) is the undisputed leader in advanced chip manufacturing. However, investors have shunned the stock recently due to risks surrounding the China-Taiwan relationship and substantial investments in U.S. manufacturing capacity. I believe these issues are overblown.
The reality is almost every major chip developer, including prominent U.S. names like Nvidia, Qualcomm (NASDAQ:QCOM), and AMD, rely heavily on TSM for their manufacturing needs. Despite that, they don’t receive the same valuation haircuts despite similar China exposure. Thus, the negativity around TSM appears excessive.
Meanwhile, the company is making huge investments in the U.S. that should eventually provide geographical diversification and profit tailwinds. TSM is investing $40 billion in chip fabrication in the U.S. Indeed, more U.S. manufacturing should alleviate national security concerns and ease tensions with China.
I expect Taiwan Semi to deliver at least double-digit annual growth per year on average this decade, driven by the secular chip demand trends. The stock trades at just 17.4-times forward earnings, which I see as an attractive entry point, especially when compared to its peers. Once macro concerns abate, TSM stock should regain its premium valuation and deliver solid returns for shareholders. To top it all off, you’re also getting a 2% dividend yield as a sweetener.
On the date of publication, Omor Ibne Ehsan did not have (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.