The semiconductor sector has been on a tear in 2023, but while giants like Nvidia (NASDAQ:NVDA) get all the headlines, some hidden gems are still waiting to be discovered. Sure, the bigger players can still climb higher, but the risk-reward ratio tends to favor the small caps in times like these. After all, how much higher can Nvidia realistically go? The enormous valuation with this stock leaves very little room for upside, especially relative to other smaller stocks with better relative growth potential.
Meanwhile, some of these lesser-known chip makers are growing sales rapidly, taking market share, and positioning themselves in some of tech’s most promising sectors. Whether it’s AI, cloud computing, or autonomous vehicles, these chip stocks are carving out their niches.
The upside potential with these stocks is huge,if you’re willing to dig a little deeper and get in early. So, tune out the noise and look beyond the mega-cap chip titans. Some of the most intriguing opportunities in semiconductor stocks can be found in those hungry young chip players that most investors have never even heard of.
Investors in this fabless chipmaker have taken their lumps over the past year, with the stock tumbling over 34%. However, MaxLinear (NASDAQ:MXL) looks ready for a turnaround, as it trades at a forward price-earnings ratio below 20-times, with impressive growth prospects on the horizon.
No doubt, the company’s near-term financials appear dreary, with a 36% revenue decline expected in 2023 and a 0.37% drop in 2024. But the tide should start to turn soon. Consensus estimates call for sales growth to recover in 2025, surging 20% year-over-year. With these negatives likely priced in, MaxLinear shapes up as a promising rebound play. The average analyst price target of $32.86 implies nearly 37% upside from current levels.
The company’s optical data center products will be a key driver of this growth, including its highly anticipated 800-gig PAM4 solution. Management noted robust design win activity, expecting initial volume shipments later this year, paving the way for a volume ramp in 2024. As AI drives massive growth in cloud data center demand, MaxLinear is strategically-positioned to capitalize and cement itself as a long-term player in optical interconnects. The company also boasts a strong footprint in areas like broadband access, WiFi, and wireless infrastructure.
While macro headwinds persist over the near-term, MaxLinear’s product roadmap should catalyze a return to growth in no time.
Like MaxLinear, Rambus (NASDAQ:RMBS) has contended with a growth slowdown over the past year. However, the pain should prove to be temporary.
Consensus forecasts call for a 1.52% revenue decline in 2023, followed by an 18.42% surge in 2024. Growth should continue accelerating to nearly 26% by 2026. The company’s earnings per share are projected to follow a similar trajectory, potentially doubling over the next few years. Reflecting promising prospects, Rambus commands unanimous “buy” ratings from Wall Street analysts, who hold a $71 average price target, representing approximately 25% upside.
Rambus remains well-positioned to capitalize on soaring data center demand driven by AI. The company aims to bolster its technology leadership through increased R&D investments in high-performance controllers and SerDes PHYs. Furthermore, the security vulnerabilities introduced by AI workloads play directly into Rambus’ core expertise in data protection. As hyperscalers deploy more powerful AI chips in advanced architectures, Rambus chips and IP solutions will be indispensable to enabling the required leaps in memory bandwidth and capacity.
Despite macro uncertainty clouding the company’s near-term outlook, Rambus’ product roadmap targeting AI data centers makes it a compelling long-term play.
Allegro MicroSystems (ALGM)
That said, amid a recent correction, I believe the stock has returned to an attractive entry point for investors to buy into its impressive growth potential at a discount. Consensus forecasts call for Allegro to deliver double-digit sales growth comfortably through 2028, with earnings per share nearly doubling over that timeframe.
The company remains a key beneficiary of secular megatrends like vehicle electrification, ADAS, and industrial automation. Allegro holds a solid competitive position in magnetic sensor ICs and power ICs, along with an enviable customer base of auto titans and leading industrial firms. Furthermore, Allegro’s acquisition of Heyday Integrated Circuits expands its presence in emerging silicon carbide markets.
Despite near-term macro uncertainty, Allegro’s essential position in supplying critical components to recession-resistant end markets makes it a compelling long-term play. On average, analysts rate Allegro a buy with a $58.7 target. That represents one-year upside potential of approximately 63% from current levels.
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