These 5 chip stocks are cheaper than the S&P 500 - and offer faster growth

By Philip van Doorn and Britney Nguyen

Micron and Nvidia are among the high-profile semiconductor companies that have been raking in cash and still have inexpensive stocks

Nvidia, Micron, NXP, SK Hynix and Qualcomm all have higher free-cash-flow yields than the S&P 500.

If you're a believer that the artificial-intelligence trade has more room to run, there are a number of cheap stocks out there - including some big names.

Among those are Micron Technology (MU) and Nvidia (NVDA), which are less expensive than the S&P 500 SPX on the basis of their forward price/earnings ratios. While the stocks have seen major gains in recent years, those rallies have failed to keep up with soaring expectations for profit growth.

And there are other reasons to be upbeat about these stocks, beyond that they're bargains.

Micron, for one, is preparing to launch a major stock-buyback program, as its cash flows have burgeoned during the AI boom. As a recipient of funding under the Chips and Science Act, the memory-chip maker's stock repurchases have been restricted over the past two years, but those limitations will ease in December.

UBS analyst Timothy Arcuri is projecting that Micron's free cash flow will amount to $155 billion next year, $225 billion in 2028 and $205 billion in 2029, putting the company's share repurchases "in a similar ballpark" as Nvidia's, despite Micron's market capitalization being about 80% smaller.

"This now lays the path for [Micron] to buy back 30% of the company over the next two years and potentially about half through [2029]," he wrote in a note to clients.

Buying back shares can lower a company's share count and increase its earnings per share. Ultimately, Arcuri thinks the company could end up repurchasing at least $200 billion worth of shares a year, and he believes the stock will be rewarded with a higher P/E multiple.

Micron's stock is currently trading at 6.0 times the consensus 12-month earnings-per-share estimate among analysts polled by FactSet. This makes it one of the cheapest stocks in the S&P 500 by that metric. Micron's forward P/E has come down from 8.3 at the end of last year.

Nvidia is another stock that is cheaper than the S&P 500 on the whole, despite explosive gains over the past few years. Buybacks are a catalyst for Nvidia shares, too, after the company recently raised its share-repurchase authorization by $150 billion to bring its total buyback program to $235 billion.

That Nvidia can invest in its technology and ecosystem while returning a significant amount of money to its shareholders reflects that it's generating cash from the AI infrastructure build-out at a scale where "those priorities do not have to be mutually exclusive," Evan Schlossman, a principal at Neostellar, told MarketWatch.

Meanwhile, U.S.-listed shares of SK Hynix (SKHY) are about as dirt cheap as Micron's stock. The South Korean memory-chip giant recently announced a $29 billion buyback program of its own. At the time of that August announcement, management said the current stock price didn't reflect its "intrinsic value."

SK Hynix's ability to lock up more business via long-term agreements and move forward with a sizable share-repurchase program suggests the stock has a "a strong re-rate factor," according to J.P. Morgan analyst Jay Kwon. That means he thinks shares could come to fetch a higher valuation.

Digging further into the chip sector

In the wake of the announcements by Micron, Nvidia and SK Hynix, we screened the PHLX Semiconductor Index SOX by looking at forward P/E ratios, projected sales-growth rates and projected free-cash-flow yields.

A company's free-cash-flow yield is its remaining cash flow after capital expenditures, or spending on physical assets. This is money that can be used do things like to pay dividends, buy back shares or fund acquisitions.

We can calculate a company's projected FCF yield by dividing the consensus estimates for free cash flow per share by a company's share price. Then if we subtract the company's current dividend yield (if it is paying dividends) from the FCF yield, we have the FCF "headroom." The headroom figure is important, because no company wants to cut its dividend payout.

There are five stocks within the PHLX Semiconductor Index that have forward P/E ratios below the 19.3 multiple of the S&P 500. Here they are, with projected sales compound annual growth rate from 2026 through 2028 and expected FCF headroom over the next 12 months:

 
Company                Forward P/E  Projected sales CAGR 2026-2028  Forward FCF yield  Dividend yield  Projected FCF headroom 
Micron Technology              6.0                           34.4%             12.23%           0.06%                  12.17% 
SK Hynix                       6.0                           34.0%             12.82%           0.01%                  12.82% 
NXP Semiconductors            13.9                            9.9%              6.81%           1.68%                   5.13% 
Nvidia                        17.5                           51.7%              4.77%           0.42%                   4.35% 
Qualcomm                      17.8                           12.5%              5.03%           2.04%                   2.99% 
                                                                                                              Source: FactSet 

The sales estimates are for calendar years, adjusted by FactSet for companies whose fiscal reporting periods don't match the calendar.

All five companies have projected sales CAGR higher than that of the S&P 500. Their forward FCF yields are all higher than the 3.33% for the S&P 500, based on weighted consensus estimates. And if we subtract the S&P 500's 1.08% dividend yield, we are left with projected FCF headroom of 2.26% for the S&P 500.

So all five stocks are priced lower than the S&P 500, with higher projected sales growth and FCF headroom.

SK Hynix (SKHY) and Micron (MU) are particular standouts, trading at less than half the forward P/E valuations of any of the others.

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-Philip van Doorn -Britney Nguyen

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10-06-26 1157ET