Ranking the 7 Top Semiconductor Stocks to Buy From Best to Worst

While most sectors suffered significant pressure this year, the innovation space (including companies ranking among the top semiconductor stocks to buy) incurred disproportionate pain. At the same time, the crimson ink facilitates upside opportunities for contrarian speculators.

Fundamentally, one of the biggest pain points for the top semiconductor stocks to buy centers on the global supply chain crisis. As Harvard Business Review mentioned, the chip shortage prompted government agencies and semiconductor manufacturers to implement unprecedented mitigatory actions. Currently, the world still struggles, presenting headwinds to the underlying sector.

Another factor to consider is the Federal Reserve. Early in the coronavirus pandemic, the central bank bought back bonds, thus introducing mass liquidity into the system. Now, it needs to unwind prior excesses, resulting in deflationary pressures (i.e. liquidity constraints). That’s problematic even for the top semiconductor stocks to buy due to their growth-driven narratives.

Still, this industry offers compelling discounts. Below, Gurufocus.com labels every one of these top semiconductor stocks to buy undervalued. The difference? Each one features varying levels of fundamental risk, catering to multiple investment styles.

ASML (ASML)

Easily one of the top semiconductor stocks to buy, ASML (NASDAQ:ASML) is the only manufacturer of extreme ultraviolet (EUV) lithography machines. However, Wall Street apparently doesn’t care at the moment, with ASML shares declining over 39% on a year-to-date basis. However, near-term sentiment turned positive recently as the security gained nearly 12% in the trailing month.

Fundamentally, ASML brings so much to the table. Primarily, the company delivers outstanding results on the income statement. On the top line, ASML’s three-year revenue growth rate stands at 20.9%, ranking higher than 76% of the competition. Its three-year free cash flow (FCF) growth rate is more impressive at 61.1%, above 85.5% of the industry.

On the bottom line, ASML enjoys a net margin of 27.5%, above nearly 90% of its rivals. As well, the company represents a high-quality business with a return on equity of nearly 59%, ranking within the top 2% of the industry. If that wasn’t enough, Gurufocus.com labels ASML as modestly undervalued, making it one of the top semiconductor stocks to buy.

Lam Research (LRCX)

Founded in 1980, Lam Research (NASDAQ:LRCX) is an American supplier of wafer fabrication equipment and related services to the semiconductor industry. Currently, Lam carries a market capitalization of $53.3 billion. Since the start of this year, LCRX dropped 47%. However, it does show some near-term moxie. In the trailing five days since the close of the Oct. 26 session, shares gained over 10% of equity value.

Fundamentally, Lam kills it regarding income statement-related metrics. On the sales front, the company commands a three-year revenue growth rate of 26.6%. This percentage beats out exactly 84% of the competition. Also, the tech firm features a three-year book growth rate of 11.9%, superior to 60% of its peers.

On the profitability side, Lam’s net margin stands at 27%. This ranks better than over 88% of semiconductor players. Importantly, Lam also features a decent-strength balance sheet. For instance, its Altman Z-Score of 6.73 reflects very low bankruptcy risk. Therefore, LRCX represents an all-around great idea for top semiconductor stocks to buy.

Nvidia (NVDA)

Based in Santa Clara, California, Nvidia (NASDAQ:NVDA) is a software and fabless company which designs graphics processing units, application programming interface for data science and high-performance computing as well as system on a chip units for the mobile computing and automotive market. At the moment, NVDA shares hemorrhaged 57% of equity value, reflecting significant volatility risks.

At the same time, bold contrarians should also consider the fundamentals. As with some of the other top semiconductor stocks to buy, Nvidia delivers on the income statement. On the top line, the company features a three-year revenue growth rate of 31.3%, ranking better than nearly 90% of its peers. Also, its book growth rate in the aforementioned period stands at 40.2%, within the top 10% of the sector.

For profitability, Nvidia’s operating margin and net margin stand at 31.5% and 26%, respectively. It’s a high-quality business, with a return on equity of nearly 32%. As well, the tech firm enjoys stability in the balance sheet, highlighted by an Altman Z-Score of 12.35 points.

STMicroelectronics (STM)

Per its website, STMicroelectronics (NYSE:STM) is a creative and manufacturing force of semiconductor technologies, devices, and solutions. It features various applications, including smart mobility and the Internet of Things (IoT). Presently, the company has a market cap of $29.2 billion. Since the start of this year, STM lost 31% of equity value. However, in the trailing five days, it’s gained almost 8%.

Fundamentally, STMicroelectronics brings a balanced picture for investors seeking the top semiconductor stocks to buy to mull over. As with the names above, the company delivers on the income statement. For instance, its three-year FCF growth rate and book growth rate stand at 28.3% and 13.1%. Both metrics are above industry average.

On the bottom line, STM enjoys an operating margin of nearly 25%, ranking better than nearly 81% of the industry. It also features a return on equity of 31.3%, reflecting a high-quality business. The balance sheet undergirds all this, particularly an Altman Z-Score of 5, putting STM in the safe zone.

Entegris (ENTG)

Entegris (NASDAQ:ENTG) is a provider of products and systems that purify, protect, and transport critical materials used in the semiconductor device fabrication process. Currently, Entegris commands a market cap of just under $12 billion. Since the beginning of the year, ENTG dropped exactly 42%. However, ENTG demonstrated near-term resilience, gaining almost 4% in the trailing five days.

Operationally, Entegris clearly represents one of the powerhouses among the top semiconductor stocks to buy. For instance, the company’s three-year revenue growth rate stands at 15.7%, ranking better than over 68% of the industry. Also, its book growth rate in the aforementioned period stands at 19.3%, well above sector average.

On the profitability side as well, Entegris owns above sector-average metrics for gross, operating and net margins. Notably, its return on equity pings at nearly 27%, better than 85% of the industry. However, the one weakness is balance sheet stability. For example, its Altman Z-Score is 3.55, which is heading toward the gray zone of bankruptcy risk.

Wolfspeed (WOLF)

Wolfspeed (NYSE:WOLF) is an American developer and manufacturer of wide bandgap semiconductors, focused on silicon carbide and gallium nitride materials and devices for power and radio frequency applications such as transportation, power supplies, power inverters, and wireless systems. At the moment, WOLF performs (relatively) better than many other top semiconductor stocks to buy, shedding “only” 12% YTD.

Technically speaking, Wolfspeed might attract traders looking to bet on volatility. According to data from Yahoo Finance, WOLF features a beta (or measure of volatility) of 1.53. Essentially, this figure means that WOLF will move on average 1.53 times the market return. Therefore, if you’re looking to do some scalp trades, WOLF could be your ticket.

Now, Gurufocus.com labels Wolfspeed’s business as modestly undervalued. As well, the company enjoys decent stability in the balance sheet. Notably, its Altman Z-Score hit slightly over 5 points, reflecting low bankruptcy risk. Still, WOLF probably represents an idea better left for speculators.

SunPower (SPWR)

SunPower (NASDAQ:SPWR) provides photovoltaic solar energy generation systems and battery energy storage products, primarily for residential customers. Currently, SunPower commands a market cap of just over $3 billion. Average trading volume is 3.72 million shares. Since the Jan. opener, SPWR lost over 19% of value, though it did gain over 12% in the trailing week.

Fundamentally, SunPower banks on the power of aspirations. With issues such as climate change and skyrocketing energy prices forcing homeowners into a rethink about the power grid, SPWR might benefit. As well, Gurufocus.com labels shares modestly undervalued based on its proprietary metrics.

Otherwise, SunPower represents a tough idea for conservative investors to follow. For instance, the company’s profitability metrics currently run in negative territory. Its return on equity also pings well below parity, reflecting a poor-quality business. And its sales trends are nothing to write home about.

However, solar energy represents a sector with a potentially massive total addressable market. Therefore, SPWR could be one of the top semiconductor stocks to buy for those who wish to roll the dice.

On the date of publication, Josh Enomoto 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.