The Chips Are Down – Time For Some Semiconductor Shopping

Nvidia’s (NVDA) recent earnings report on August 28 sent shockwaves through the semiconductor sector, highlighting both its influence on the broader industry and potential opportunities for investors looking beyond the headline-grabbing tech giant. While Nvidia surpassed analyst expectations, the report included production delays for its new Blackwell GPUs, causing a significant pullback in its stock price—more than $400 billion in market capitalization has been wiped out as shares have dropped over 15% hence.

Reports that Nvidia had been subpoenaed by the U.S. Department of Justice over antitrust violations created more waves in the sector, even as the company responded, “We have inquired with the U.S. Department of Justice and have not been subpoenaed. Nonetheless, we are happy to answer any questions regulators may have about our business.”

From my perspective as a value-oriented investor, Nvidia’s lofty valuation still puts it out of reach for those seeking attractively priced stocks with significant reward for the risk that is being taken. This is the case, even as the stock is off more than 21% from its all-time closing high price of more than $135 reached back in June.

True, at The Prudent Speculator, I focus on stocks that are out of favor, but they also need to trade for inexpensive valuations. NVDA sort of checks the first box, though it is hard to call a stock with $2.6 trillion of market capitalization unloved, but not the second. The forward P/E ratio of 32 gives me pause, though it is hardly in the stratosphere, but the current multiple of sales at 27 and book value at 45 are still too rich for my liking.

Nvidia is a stock very much on my radar and should the shares drop below $90, they would pique my interest. The company’s importance to the chip industry also cannot be ignored as investors eagerly await any news related to its performance, as it often signals trends that ripple through the entire semiconductor and technology ecosystems.

Two Out-of-Favor Chips Worth a Nibble

One stock that looks compelling in this environment is Intel (INTC). While Nvidia has come to dominate the AI realm with high-performing GPUs, Intel is not so quietly undergoing a significant transformation. Recently, Intel’s CFO, David Zinsner, revealed at an investor conference that the company’s contract chip manufacturing business, a key element of its turnaround plan, will start generating meaningful revenue by 2027.

This foundry business is critical for Intel as it transitions from a legacy chipmaker to a more diversified semiconductor powerhouse. Intel’s decision to prioritize its 18A manufacturing process over the older 20A process indicates the company’s commitment to advancing its technology and maintaining competitiveness in the global market.

Certainly, one cannot overlook that Intel is still grappling with operational issues, including a 15% staff reduction and the shedding of some of its businesses. A recent Reuters report that cited anonymous sources suggested that Intel also has struggled to produce viable test wafers for its customer Broadcom. And Mr. Zinser chose to not directly address that matter at an investor conference on September 4.

Nevertheless, the company is expected to still benefit from the U.S. CHIPS Act, which allocates billions in grants to boost domestic chip manufacturing. Even as the timing of any potential payoff is highly uncertain, I find the valuation compelling relative to its potential long-term growth prospects, particularly should it gain share within contract chip manufacturing. With structural improvements, Intel could offer substantial upside in the coming years, especially as the semiconductor industry continues to grow.

Another stock worth considering is Micron Technology (MU), given its focus on DRAM and NAND memory technologies, which are integral to many AI and data center applications. Like Intel, but owing to different industry dynamics, Micron shares have come under pressure, falling more than 40% since peaking in June. However, the company resumed its share repurchase program in early August to offset dilution—a positive for owners.

Despite Micron’s recent volatility, its long-term earnings potential is attractive. In 2023, the company reported a significant loss, but analysts expect a turnaround starting in 2024, with EPS projected to rise to $1.23, followed by a substantial increase to $9.60 in 2025 and $12.42 in 2026. If these projections hold, Micron’s P/E ratio would be extremely low, making it a compelling deep-value opportunity.

While Nvidia commands much of the spotlight in the semiconductor industry, investors would be wise to look beyond its still-premium stock price and consider more attractively valued companies like Intel and Micron. I think both are positioned to benefit from long-term industry trends and offer better value propositions for patient investors.