Alpha and Omega Semiconductor Limited Has Strong Fundamentals & Valuation

Semiconductor stocks have been under pressure despite industry tailwinds as countries around the world work on ramping up domestic microchip research and production. The selling pressure has been presenting investors with better entry levels for semiconductor stocks.

In the U.S., the microchip sector was recently given a boost after Congress passed the CHIPS Act of 2022.

The legislation commits $52.0 billion toward subsidizing U.S. semiconductor production and research. The act also includes an investment tax credit, estimated to be worth $24.0 billion, for microchip plants. (Source: “U.S. Congress Passage of Subsidies Prompts Chip Makers to Move on Projects,” Reuters, July 28, 2022.)

My view is that the funding will accelerate research and the building of microchip foundries in the U.S. Smaller chip companies like Alpha and Omega Semiconductor Limited (NASDAQ:AOSL) could benefit from this major investment.

The company designs and develops power semiconductors that are used in high-volume applications such as computing, consumer electronics, communications, and industry.

Alpha and Omega Semiconductor Limited has solid fundamentals, and AOSL stock's valuation has become more attractive after declining by 43% from its record high of $69.99 in March 2022.

My view is that the selling of Alpha and Omega Semiconductor stock was overdone and driven by negative industry sentiment rather than a change in AOSL stock's underlying fundamentals. In my view, this presents a good opportunity.

Alpha and Omega Semiconductor Limited has been steadily ramping up its revenues, and that growth is expected to continue.

Look for the company to report revenue growth of 17.8% to $773.6 million this year, followed by 10.4% to $854.3 million in 2023. (Source: “Alpha and Omega Semiconductor Limited (AOSL),” Yahoo! Finance, last accessed August 1, 2022.)

Assuming those estimates pan out, this implies that Alpha and Omega Semiconductor Limited is trading at only 1.3 times its consensus 2023 revenue estimate.

On the bottom line, the company is highly profitable. Alpha and Omega Semiconductor Limited earned an adjusted $2.93 per diluted share in 2021. It's expected to report earnings growth of 52% to $4.46 per diluted share this year, followed by $5.00 per diluted share in 2023.

The company's valuation of 8.1 times its consensus 2023 earnings-per-share (EPS) estimate is extremely low.

Great Risk/Reward Trade-Off With Alpha and Omega Semiconductor Stock

Shares of Alpha and Omega Semiconductor Limited mounted a big rally from its March 2020 low to its channel breakout in September/October 2020. The buying was driven by the emergence of a golden cross, a bullish technical crossover pattern in which the 50-day moving average breaks above the 200-day moving average.

But after its high in February 2021, AOSL stock moved lower in a downtrend and death cross pattern to below key support at $35.00.

The weakness was short-lived, as Alpha and Omega Semiconductor stock again moved into a golden cross pattern and broke out in October 2021. AOSL stock topped again at $70.00 and then moved down to its current level.

Chart courtesy of StockCharts.com

Support for Alpha and Omega Semiconductor stock at $35.00 appears to be solid. If AOSL stock can hold at that level, it could make another move toward the moving averages, followed by congestion at $50.00–$60.00 and $70.00.

Analyst Take

Shares of Alpha and Omega Semiconductor Limited look attractive at their current price, based on the company's fundamentals and financial forecast.

As just mentioned, Alpha and Omega Semiconductor stock could mount another attack toward $70.00, which would be a 75% gain.