After recent boom years, investors in the semiconductor industry have experienced a rough year so far in 2022. You only need to look at the VanEck Semiconductor ETF (NASDAQ:SMH) to see how punishing this year has been to chip investors. A leading chip stocks fund with more than $6 billion in net assets, the ETF has been down 35% in the past ten months.
It wasn’t always like this, though. In recent years, semiconductor companies moved to actually expand their production capacity to address global chip shortages. Amid these shortages, chip prices soared, generating premium margins for semiconductor companies. But investors have lately soured on chip stocks amid concerns that the expanded capacity could lead to a supply glut that would, in turn, damage prices. Hence the multi-month sell-off.
Recession concerns have also scared off some investors from the semiconductor industry because of worries over the potential weak demand for chips. Moreover, the U.S. government’s recent decision to restrict the sale of certain chips to China has only increased uncertainty for semiconductor industry investors. As a result, chip stocks across the board have dropped sharply from their recent peaks. But when there’s chaos, there’s also opportunity, and now may be the best time to go bargain hunting for oversold semiconductor stocks. Let’s take a look at two such stocks that are worth considering for a rebound play.
Taiwan Semiconductor Manufacturing (NYSE:TSM)
The chip supply chain has many participants. TSM participates in the production side. As its name suggests, the company is based in Taiwan, a global chip production capital, where they handle contract chip production and are the world’s leading provider in that space.
In fact, Nvidia recently tapped TSM to manufacture its latest generation of gaming graphic chips, which is a big win for them as Nvidia produced the previous generation of those chips at Samsung factories. The company has, over the years, invested in improving its manufacturing technology, making them the easy choice manufacturer for advanced semiconductor components.
It’s worth noting that the passing of the Chips Act caused some jitters among TSM investors. Many worried that the U.S. domestic semiconductor subsidy program could undercut Taiwan’s competitiveness in the chip manufacturing market and deal a blow to its companies like TSM. But Taiwan has gone out of its way to reiterate its position in the global semiconductor supply chain and argue that the Chips Act doesn’t threaten its chip industry.
If anything, TSM actually stands to benefit from the Chips Act. The company is setting up a $12 billion semiconductor plant in Arizona, putting them in a position to benefit from the U.S. chip industry subsidy and tax credit program.
In the midst of all this, though, TSM shares recently fell to a new 52-week low, but looking at the charts, a bullish setup has started to emerge. There’s a strong argument that a low could soon be put in as the RSI reading of 35 now indicates the stock is extremely oversold.
Nvidia is one of the better-known semiconductor names out there, and they design graphics processing chips that power a variety of gaming devices. The company also makes artificial intelligence chips used in data centers and other applications. Nvidia recently unveiled a new and advanced generation of its flagship GeForce graphics chips for the gaming industry, and in a show of its market might, they maintained high price tags on these. There’s a risk that the U.S. ban on the sale of advanced semiconductor components to China might hurt sales, but in all likelihood, the company’s latest graphics chips won’t be affected.
Still, its shares have been selling off since March. In addition to the broader concerns around the industry’s outlook and recession fears, Nvidia’s mixed earnings report for the most recent quarter also caused investors heartburn.
This week they hit a new 52-week low of $125, but with the stocks RSI approaching the 20s, you have to be thinking they’ll soon be very oversold. Indeed, it’s around this level that they consolidated back in 2020 and 2021, so there’s a fair chance the bulls will be stepping in again this time.
If you’re a fan of the industry over the long term, you might want to start thinking about backing up the truck.
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