With the Nasdaq taking investors on a roller coaster ride this year, many have sought refuge in mega-cap tech names like Nvidia (NASDAQ:NVDA). However, some of the best bargains right now are in smaller semiconductor stocks flying under Wall Street’s radar. While not rivals to titans like Nvidia or AMD (NASDAQ:AMD), these chip makers boast massive growth potential and trade at bargain basement-level valuations. Snapping up shares now could deliver outsized returns in 2023 and beyond.
Of course, small caps carry elevated risks, especially when considering looming recession fears. But with valuations compressed, many of these semiconductor stocks are trading near historic lows. Their risk-reward outlooks appear skewed to the upside for patient investors with a long-term focus.
Rather than chasing over-extended momentum stocks, it pays to discover under-followed names in beaten-down sectors. While semiconductor demand remains robust long-term, inventory gluts and falling memory chip prices have stung in the near term. This dynamic has created bargains in many small-cap chip stocks.
Atomera (ATOM)
Atomera (NASDAQ:ATOM) is one of the most beaten-down names in the semiconductor space. Its stock has plunged nearly 87% from 2021 highs. However, with shares trading near multi-year lows, the stock’s risk/reward is skewed sharply higher for long-term investors. A strategic partnership provides major validation of Atomera’s technology and could open the floodgates for new licensing deals.
Atomera’s core technology is Mears Silicon Technology (MST), which enhances semiconductor performance by modifying materials at the atomic level. MST improves speed, power efficiency, and reliability without requiring changes to manufacturing tools. It has broad applications in analog, logic, and memory chips.
Despite strong customer validation, Atomera has struggled to generate meaningful revenue. The company’s business model centers on upfront licensing fees and royalties, but deals have been slow to materialize. However, a landmark partnership with semiconductor giant STMicroelectronics (NYSE:STM) changes that narrative.
In April, STM licensed MST for use across multiple next-generation products. While financial terms weren’t disclosed, this deal will provide vital production validation and credibility. As STM integrates MST into its manufacturing process, investors will increasingly realize that MST is a proven solution ready for mass adoption.
Royalties from STM shipments will start flowing in over the next 18-24 months. I estimate these could reach tens of millions annually within three years, meaningful for a company with negligible revenue today. More importantly, success with STM should open up enormous new licensing opportunities.
Its balance sheet is solid, with $20 million in cash against minimal debt. Thus, I don’t see any liquidity issues ahead for at least two years. The sole Wall Street analyst with a price target of $13 per share implies almost 150% upside in one year for ATOM stock.
JinkoSolar (JKS)
JinkoSolar (NYSE:JKS) is not a pure-play chip stock, but the company is a major producer of silicon wafers for solar modules. It also manufactures solar cells, panels, and other components critical to the industry. While the company deals in commoditized products, JinkoSolar’s scale and low-cost manufacturing in China give it a competitive advantage.
With its stock down 53% from 2022 highs, JinkoSolar trades at bargain basement valuations despite strong fundamentals. It has earned $3.25 per share ($12.2 expected for all of 2023) over the past quarter but trades around just $35 per share. Thus, shares fetch less than 3-times forward earnings and less than 0.11-times forward sales.
Revenue surged nearly 60% last quarter to $4.36 billion as polysilicon costs retreated. This drove gross margins to 19.3%, up from 15.7% last year. Net income is up 141% year-over-year to $181.4 million. Profitability should continue improving as lower materials costs boost margins. JinkoSolar expects full-year module shipments of 70-75 gigawatts.
Of course, JinkoSolar’s debt-heavy balance sheet is a risk factor to consider. However, the company is already generating positive free cash flow while reducing leverage. As profits grow, its balance sheet will steadily improve. China is in a deflationary environment which will lead to looser monetary policy, and we are looking at interest rates likely near or at their peak in most countries. Regardless, the company is managing to churn out impressive profit metrics, and I’m not too worried.
ACM Research (ACMR)
ACM Research (NASDAQ:ACMR) manufactures wet-cleaning tools for semiconductor wafers at various manufacturing steps. Its proprietary technologies optimize efficiency and purity at mature process nodes. Revenue is split between logic and memory chip makers inside and outside of China. Indeed,
2023 has been volatile for ACMR stock, which has tumbled 19% from its October high. However, the company’s financial performance remains rock-solid. Revenue grew 26% year-over-year last quarter, driving a 68% earnings beat. The consensus estimate calls for 37% sales growth this year.
Despite moderating growth in the global WFE market, ACMR continues gaining share. Its niche wet-cleaning tools are critical for producers focused on high-volume mature nodes. With expertise in advanced packaging, ACM Research also provides mission-critical technologies. Trading around 12-times earnings at this growth rate seems too cheap. The company is estimated to triple revenue by 2030 by capturing more business in China, and perhaps, globally.
In the near-term, macro headwinds persist. Lingering supply chain constraints have delayed some tool deliveries. A slowdown in China adds uncertainty and may temporarily dampen orders. However, these issues don’t alter ACMR’s long-term trajectory. ACM Research operates in an essential subset of the semiconductor industry. As new fabs are built globally, demand for wafer cleaning tools will continue rising. But most importantly, as sanctions against China’s semiconductor imports begin to roll in, ACMR seems well-positioned to receive massive amounts of domestic investment. The average Wall Street analyst sees nearly 50% upside here in the next year.
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.
