Nasdaq stocks have undeniably a tough year in 2022. The index is down nearly 25% following a short-lived rally. This sell-off naturally creates investment opportunities, but there is a caveat to finding undervalued stocks — just because a stock declines doesn’t mean it’s undervalued.

Finding undervalued Nasdaq stocks to buy first requires to define what we mean by “undervalued.” Is it a 20% discount, 40% or more? In these market conditions, even a 15% difference between intrinsic value and observed stock price is a nice safety margin.

The following stocks are undervalued, offering the potential for great risk-adjusted returns when their true value and their public-traded prices converge.

Immersion (IMMR)

Immersion (NASDAQ:IMMR) is a company that develops haptic technologies in North America, Europe and Asia.

Immersion’s shares are most flat in 2022, down by 3%. Its price-to-earnings (P/E) ratio is 12, and it has a one-year target estimate of $10, an 81% upside potential.

After two consecutive years of declining sales growth, in 2019 and in 2020, 2021 has seen positive revenue growth of 15.21%.

The company has very strong net income growth in 2020 and in 2021, with figures of 126.95% and 131.14% respectively. The free cash flow growth in 2021 was phenomenal, going from a loss of $25,000 to a gain of $17.11 million.

Its forward price-to-earnings and enterprise value-to-sales ratios of 10.6 and 1.1 respectively are well below the information technology sector median values. These discounts create an investment opportunity.

Alpha and Omega Semiconductor (AOSL)

Alpha and Omega Semiconductor (NASDAQ:AOSL) is a developer of semiconductors for various applications.

The shares are down 37% in 2022 and trade at a P/E ratio of only 2.5. The one-year target estimate is $57.33, with an upside potential of 50%.

The business looks very strong, as sales growth accelerated 41.3% in 2021 to $656.9 million. Net income growth was very strong as well, going from a loss of $6.6 million to a gain of $58.12 million. Its free cash flow also went from an $83,000 loss to $56.04 million. This is huge growth.

Turning to valuation, AOSL stock’s key financial ratios are well below information technology sector median values. The forward P/E of 2.5 for the stock is 90% lower than the value of 23.34 for the sector. This difference signals a deeply undervalued stock.

Himax Technologies (HIMX)

Himax Technologies (NASDAQ:HIMX) is another semiconductor company focused on display imaging processing technologies.

HIMX shares have declined 38% in 2022, creating a big investment opportunity. The global chip shortage and the demand-supply gap is favorable for the company. Sales growth has been very strong for Himax over the past two years. In 2020, the revenue growth was 32.08% and it accelerated to 74.35% in 2021.

It is hard not to like the profitability trend as net income growth of 446.26% in 2020 was followed by 826.85% growth in 2021. That resulted in a net income of $437.73 million. As with the other two undervalued stocks, there is a clear pattern. Huge free cash flow growth supports higher stock prices based on discounted cash flow models.

The company delivered very strong free cash flow growth in 2020 and in 2021, with 353.06% and 293.17% respectively. The stock trades at a P/E ratio of 3.5 and offers a forward dividend yield of nearly 13%.

Himax has price-to-earnings growth of only 0.01, a classic definition of a true gem and real bargain.

On the date of publication, Stavros Georgiadis, CFA  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.