Sell-Off In Chip Stocks: A Big Buying Opportunity With Intel And TSM

Semiconductor stocks have had a big run over the last several months, and this sector was due for a pullback. As shown in the chart of the VanEck Vectors Semiconductor ETF (SMH) below, we just got a big pullback. This was even a plunge in some stocks, with some top names dropping 10% or more in a single day. This plunge appears to have been fueled by multiple factors. First of all, some of the stocks in this sector moved too far, too fast and were due for a correction from overbought levels. Secondly, interest rates have moved significantly higher in the past 3 weeks or so and the Federal Reserve seems to be resetting expectations to a higher for longer viewpoint. Higher interest rates impact the tech sector because investors are not willing to pay as much for growth when rates are elevated. I would say the third factor in the chip stock plunge seems to be concerns about an AI bubble.

As mentioned before, some chip stocks seem to have run too far, too fast and were overbought. This includes stocks like NVIDIA (NVDA) which was trading for about $950 per share in March. On Friday, April 19, 2024 this stock dropped 10% and it now trades for around $762 per share. I am slightly tempted to buy this stock for a trade as it is now oversold and I like the set up for NVIDIA going into earnings much more now with this stock at lower levels. However, I like another stock better due to valuation, as a play on NVIDIA and will get into that more below.

According to Earningswhispers.com, NVIDIA is set to report earnings for Q1 2024, on May 22. The consensus estimate is for $5.14 per share in earnings with revenues expected to come in at $22.07 billion. It would not surprise me to see NVIDIA significantly beat the estimate, and for shares to jump, now that the stock has been reset to lower levels. However, I am more interested and more comfortable buying some of the less exciting names that are less volatile (and did not drop 10% in a single day on April 19). Let’s take a closer look at two stocks that appear to offer significant value after this plunge in chip stocks:

Intel

I last wrote about Intel (INTC) when it was trading for just about $26 per share, on October 17, 2022. I believed that was a major buying opportunity, when it was trading so low, and subsequently the stock ended up roughly doubling in value as it went up to about $51 per share. However, in the past few weeks, Intel shares have plunged, along with many stocks in the chip sector. While Intel is not as cheap as when I last wrote about it, the recent pullback is significant and appears to be one of the best buying opportunities the market has presented for quite a while. However, whenever a sector or the market in general is in a correction, it makes sense to buy gradually so that further weakness can be bought as well if it presents itself.

The Chart For INTC

As shown in the chart below, Intel shares were trading for about $50, late in 2023 and also in early 2024. Intel shares are now oversold and trading for just about $34. The 50-day moving average is $41.81 and the 200-day moving average is $39.74. Markets tend to overshoot to the upside and to the downside as well. I think we saw too much optimism (and an overshoot to the upside) when Intel shares were trading for $50, not long ago. Now, I think we are seeing too much pessimism and an overshoot to the downside with Intel trading for just about $34.

Recent Developments Impacting Intel

1) Intel recently announced that its foundry business was expected to see operating losses peak in 2024, and that it did not plan to achieve break-even operating results until around 2030. This led to a selloff in the stock along with some analyst downgrades. An analyst at Bernstein stated there is “No real reason to be here until 2030”. However, that same analyst has a $42 price target for Intel shares, and a lot can happen between now and 2030.

2) A new report came out in April stating China has demanded that telecom companies stop using non-domestic chips by 2027. This would seem to be impacting companies like Intel and Advanced Micro Devices (AMD) the most. However, 2027 is a ways off and there is always some chance that the escalating trade war between China and the United States could improve in the next 3 years. In addition, Intel has the next three years to find a potential offset for chips it currently sells to Chinese telecom companies. Nonetheless, this was another excuse to sell Intel shares, and it did drop on this news.

Intel Valuation And Upside Catalysts

Intel shares have recently reset thanks to some negative headlines and a plunge in the chip sector. I think the selloff is overdone, in particular because no one should be expecting anything but losses from the foundry business at this point and also because 2024 was not supposed to be an exciting year for the company. The bright future for semiconductors remains intact and the need for chips to be produced by American companies in the United States is an increasingly important national security issue.

Analysts expect Intel to earn $1.35 per share in 2024, with revenues expected at $54.47 billion. As such, 2024 is not an exciting year, it is a transition year and a year to gear up for much better things to come. For example, the company is expected to earn $2.30 per share in 2025, and see revenues jump to around $64 billion. More growth is expected in 2026, with analysts estimating $2.95 per share in earnings and revenues topping about $70.74 billion. With Intel shares now trading for about $34, the forward price to earnings multiple is less than 15 times 2025 earnings, and just around 11 times 2026 earnings estimates. For additional and longer term analysis on Intel’s earnings potential, check out Victor Degunov’s recent article, in which he lays out the potential for earnings to grow sharply beyond 2026, and for the stock to possibly trade for $200 per share in 2030 (based on EPS of nearly $8). Right now, it does not seem like an exciting time to be buying Intel shares but sometimes in hindsight, it is best to buy when other investors are not excited and willing to sell at lower prices.

Potential Downside Risks For Intel

While the news lately has not been great for Intel, the long term upside catalysts remain intact; this includes growing demand for chips, earnings growth at Intel and the potential for investor sentiment to shift to a more positive level. I believe that the biggest potential downside risk for Intel is clearly management execution risks. Intel and its management team have made real progress in the past couple of years, but more work needs to be done before investors believe in this chip company again in my opinion.

Taiwan Semiconductor

Taiwan Semiconductor Manufacturing Company (TSM) is a leading producer of chips and it makes them for many of the top companies, including NVIDIA. This is why I like Taiwan Semiconductor as a play on and as a beneficiary of NVIDIA’s success in AI and other segments. The valuation of Taiwan Semiconductor is much lower than NVIDIA’s and this stock also had a recent correction which appears to be an attractive buying opportunity.

The Chart for TSMC

As the chart below shows, this stock had a nice runup to nearly $160 per share in March, but it has since plunged. This stock took a hit after it reported earnings and also because of the general selloff in chip stocks. The 50-day moving average is $136.29 and the 200-day moving average is $106.49.

Recent Developments Impacting Taiwan Semiconductor

This company recently reported earnings for Q1 2024. On April 18th, 2024, the company reported profits of $1.38 per ADR share, and revenues of $18.87 billion, which beat estimates by $860 million. Revenues were up 12.9% year over year, but this represented a decrease of 3.8% from the previous quarter. The stock dropped on this news, in part it seems because it has run up so much prior to earnings. There were also some concerns about profit margins due to the rising cost of energy and some impact from the recent earthquake in Taiwan. Analysts at Needham called the selloff “overdone“. I agree and believe this is an ideal buying opportunity.

Taiwan Semiconductor Valuation

Analysts expect Taiwan Semiconductor to earn $6.24 in 2024, on sales of $83.86 billion. In 2025, earnings are expected to jump to $7.79 per share, with revenues coming in at just over $100 billion. For 2026, earnings estimates call for a profit of $9.02 per share and revenues of $113.8 billion. With Taiwan Semiconductor shares now trading for about $127, the stock is only valued at about 16 times earnings for 2025 and even less for 2026. By contrast, NVIDIA is currently trading for about 30 times earnings.

Potential Downside Risks For TSMC

China invading Taiwan is a huge concern and this could significantly impact Taiwan Semiconductor, but it also would likely be a huge blow to the global economy and create a major stock market correction around the world. So, while buying shares of any company that is based in Taiwan might appear foolish at first glance, the reality is that buying and owning any stock (other than defense contractors) could be a big losing proposition if Taiwan is invaded.

I recently wrote an article about Alibaba (BABA), and in that article, I point out that China could just be bluffing about invading Taiwan. That’s because war games analysis suggests that China would lose, and even if it “won” I believe it would still lose. An invasion could bring about catastrophic damage to those in power now as well as to the economy, on top of the human toll. Talk about invading Taiwan is cheap, the reality of doing so would not be, and for this reason, I am hopeful that cooler heads will prevail. Also, I never seem to see much concern when it comes to Apple (AAPL) or NVIDIA when it comes to the potential fallout of a Taiwan invasion. So, while it might feel more comfortable buying and owning those stocks, NVIDIA would likely be hugely impacted by an invasion of Taiwan and could have just as much downside or more because it trades at a much higher valuation when compared to Taiwan Semiconductor. Apple could be massively impacted as well, because it sources chips from Taiwan and it has major operations in China.

In Closing

The future remains very bright for the chip sector. This bullish view seems likely due to AI and also because of the potential for humanoid robots in the not too distant future, which is likely to create a massive new level of demand for chips. Not long ago, NVIDIA’s CEO Jensen Huang said we are only at the beginning of an AI computing ramp that will last for years. In addition to the massive potential of AI and humanoid robots, there are other bullish factors coming up in the not too distant future.

Microsoft (MSFT) has stated it would retire Windows 10 on October 14, 2025 and the end of support for Windows 11 on November 11, 2025. Between this and the potential for new PC’s to have built-in AI related functions, a major upgrade cycle could be in the works for consumers and businesses. Furthermore, when PC’s are upgraded, other devices are also often upgraded which could boost chip demand significantly starting in 2025, and beyond. With all of these positives looming over the chip sector in the coming years, this seems like an ideal time to be buying shares in these companies before the eventual rebound occurs.

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