Walk into a car dealership these days and you'll notice something: There are few vehicles to choose from. That's because a global chip shortage is having a huge effect on manufacturing – and creating a boon for semiconductor stocks.
And it's not just cars. Everything from your refrigerator to smartphone is reliant on chips these days. The COVID-19-related shortage really puts that fact into perspective, and helps drive home the idea that chip stocks belong in your portfolio.
The reality is, our modern world runs on chips, and they form the backbone of the global economy. Every tech trend – cloud computing, e-commerce, self-driving cars, etc. – use a hefty dose of semiconductors to make it happen.
Demand for all things chip is growing by leaps and bounds. According to tech researcher Gartner, worldwide semiconductor revenues grew 10.4% last year to $466.2 billion. That's during the pandemic and a period of overall lower manufacturing numbers.
Given their importance in society now and in the future, investing in semiconductor stocks makes sense. And the beauty of this industry is that it caters to multiple styles of investing. Looking for hyper growth? The semis have it. But if you prefer steady dividend growth? Maybe value? Chip stocks deliver on these fronts, too.
Read on as we explore six of the best semiconductor stocks and a chip-focused exchange-traded fund (ETF). The companies listed here cover a broad swath of the semiconductor universe, from designers and manufacturers to equipment and materials firms.
Data is as of June 30. Dividend yields are calculated by annualizing the most recent payout and dividing by the share price.
- Market value: $498.5 billion
- Dividend yield: 0.1%
- Specialty: Graphics
You can't have a group of the market's best semiconductor stocks without including Nvidia (NVDA).
The firm has been a top performer for years now as a variety of tech trends have played out. NVDA's graphics cards and processors are ideal for the rapid-fire computing needed in a variety of applications. This includes data centers and artificial intelligence (AI). Even Bitcoin miners rely on Nvidia's products.
That sort of torrid demand has resulted rapid revenue growth. For the chipmaker's full fiscal 2021, Nvidia saw a 53% spike in sales. That growth has only exploded further amid the start of the new fiscal year, and the waning of the pandemic. In NVDA's first quarter of fiscal 2022, revenue increased 84% year-over-year, while net income more than doubled.
But what is exciting about Nvidia is that it continues to find ways to grow.
Data center and AI needs are only in their third innings and NVDA is playing the long game. With its pending buyout of Arm, the chipmaker will now have the ability to completely build out its end-to-end ecosystem.
"The future of computing is going to move further from the cloud to the edge," says Jensen Huang, founder and CEO of Nvidia. "That is what Arm is fantastic at. Where we are fantastic is AI. So, imagine the possibilities in putting AI at the edge."
Edge computing is basically processing that's done at or near the source of the data. That could be in device calculations or through various smaller or private cloud nodes. The idea is that latency is reduced and security is boosted. Nvidia really has its pulse on the future of the cloud and computing.
NVDA shares aren't cheap, clocking in at a forward price-to-earnings (P/E) ratio of 46.4 using the current fiscal 2023 earnings estimate of $17.25 per share. But given that Nvidia continues to power the bleeding edge of technology, it might keep justifying its lofty valuation.
- Market value: $95.3 billion
- Dividend yield: N/A
- Specialty: Memory chips
Micron Technology (MU) is a leading producer of memory chips. These integrated circuits are used to store data and process code, and are found in smartphones, PCs and cloud computing networks, to name a few.
Two types of memory storage technologies that MU specializes in are DRAM (dynamic random-access memory) and NAND (flash memory chips).
Back in 2018, MU stock felt the brunt of a flood of DRAM chips, taking a 50% haircut in its share price during the second half of the year.
However, these days, the chip shortage and continued demand across a variety of channels has boosted spot prices for DRAM chips. And that has supported Micron's fortunes. In its fiscal third quarter, MU revenues jumped 36.4% to $7.42 billion, while adjusted earnings per share (EPS) more than doubled to $1.88. The chipmaker also forecast DRAM demand to rise 20% in fiscal 2021, while NAND growth is expected to arrive in the mid-30% range.
Analysts believe the shift will be long-lasting. BMO analyst Ambrish Srivastava says Micron's results will continue to be "driven by a combination of supply dynamics/(capital expenditures) discipline, and demand drivers" – all of which is positive for DRAM pricing and earnings.
It's positive for investors targeting chip stocks, as well. MU hasn't been shy about spreading the wealth to its shareholders. Over the last two years, the firm has spent roughly $3.0 billion buying back stock. And it still has about $9.8 billion in cash on its balance sheet.
- Market value: $56.7 billion
- Dividend yield: 1.1%
- Specialty: Communications and microcontrollers
Quick. Name any of the biggest trends in technology. There's a good chance you listed self-driving cars, automation, the Internet of Things (IoT) or even peer-to-peer transactions. NXP Semiconductors (NXPI) is involved in many of these ideas and more.
NXPI's focus is specialty chips – specifically, those that deal with connectivity. We're talking about chips that connect industrial machines to the internet, your car to other cars and communications networks, your thermostat to your HVAC unit.
NXP Semiconductors also created near-field communication (NFC) chips that are used in mobile-to-mobile payments and allow you to "tap" your phone at the check-out register.
The problem for NXP Semiconductors is that it has suffered from a one-two punch. First, sales took a hit during the trade war with China. Then, the COVID-19 pandemic reduced demand for many of its connectivity products. As a result, NXPI has seen its revenues slip a bit in recent years (down 5.6% year-over-year in 2019, and off 3% in 2020).
But like many of the semiconductor stocks on this list, the fairytale has a happier ending, and revenues are finally starting to kick into high gear.
In the first quarter of 2021, NXPI reported sales growth of 41% over its pandemic low. Margins on those sales have improved, as well. NXP is now selling more advanced specialty chips at higher price points. That's driven the firm's profitability, too. The company reported EPS of $1.25 in Q1, compared to an 8-cent-per-share loss the year prior.
Perhaps the best part of NXPI's story is that the chip stock remains cheap. Given its estimates for growth amid the rebound, it can be had for a forward P/E of just 21.5. That's less than the broader S&P 500 (.SPX). Considering its future focus, that's an attractive valuation for the long haul.
- Market value: $177.6 billion
- Dividend yield: 2.2%
- Specialty: Digital signal processing
Boring with a side of growth could be the best way to describe Texas Instruments (TXN).
TXN cut its teeth on basic analog chips and graphing calculators. The company has been around since the 1950s, and many of the earliest advancements in transistors and integrated circuits were done here. This business is still relevant, with Texas Instruments churning out about $3.3 billion in analog revenue last quarter – roughly 76% of total sales.
The real win is that Texas Instruments uses its own foundries rather than third parties. That's kept it insulated from the current chip shortage.
Better still is its history of innovation in the semiconductor world. TXN isn't sitting on its laurels. Over the past five years or so, the firm has quietly and quickly transformed itself into a maker of specialty chips, as well. These days, Texas Instruments offers a plethora of high-tech solutions covering IoT, automation, renewable energy, biosensing, head-up displays and more.
The combination of the higher-margin specialty semiconductors coupled with its steady analog business has produced a cash flow growth machine. Last year during the pandemic, TXN's free cash flow margin hit 38%.
Texas Instruments isn't stingy with that cash, either. The firm has managed to grow its dividend for the last 17 years straight, including a 13% hike right in the middle of the pandemic. It's a buyback champion, too, repurchasing $2.6 billion in shares in 2020.
All in all, Texas Instruments represents one of the more stable and mature semiconductor stocks with plenty of growth in the tank.
- Market value: $290.8 billion
- Dividend yield: 0.5%
- Specialty: Photolithography systems
There's a good chance you've never heard of ASML Holding (ASML). But the firm is vital to the industry. Unlike the rest of the semiconductor stocks on this list, ASML doesn't actually make or design chips itself.
What it does do is create the equipment needed to produce semiconductors. And, more importantly, advanced and specialty semiconductors.
ASML is one of the only games in town when it comes to extreme ultraviolet (EUV) lithography systems. These systems use light to print circuit patterns onto silicon wafers. EUV really lets you pack on the nanometers and expand computing power in a tight space. Without it, all of the specialty semiconductor producers on this list would be out of a job.
This fact has made ASML a profit and cash flow machine. For its latest quarter, the equipment manufacturer reported $5.2 billion in sales. Not too shabby considering they sold only 76 lithography units during the quarter. The win is that its equipment comes with very high price tags and margins. Gross margins clocked in at 53.9% for the quarter. This helped push Q1 EPS up 244% year-over-year.
"The build-up of the digital infrastructure with secular growth drivers such as 5G, AI and high-performance computing solutions fuels demand for advanced and mature nodes in logic as well as memory," said the company's CEO Peter Wennink.
In other words, if you want tech trends and innovation, you'll have to go to ASML to make it happen. As such, the firm now predicts that overall revenues will grow 30% for all of 2021.
All of that puts ASML at forward P/E of 46. Not cheap, but considering its importance in the semiconductor world, it's justified.
- Market value: $623.2 billion
- Dividend yield: 1.5%
- Specialty: Microprocessor manufacturing
As far as semiconductor stocks go, Taiwan Semiconductor (TSM) could arguably be the most important in the world. And yet, TSM doesn't actually own any of the intellectual property tied to its design.
TSM is a foundry, meaning it acts like a third-party manufacturer for other firms. It's a complex and expensive process to produce semiconductors. To that end, the vast bulk of companies turn to foundries to churn out their chips.
The win for Taiwan Semiconductor is that it created the pure-play foundry model back in the 1980s and has used that first-mover status to become the largest chipmaker on the planet. Last year alone, the firm produced 11,617 different chip varieties for over 500 different customers. All in all, TSM holds a 57% total foundry market share.
Those different varieties include logic and specialty chips. Over the last few years, Taiwan Semiconductor has spent some hefty CapEx to expand its production of specialty chips. That growth and spending is predicted to continue.
TSM plans to spend more than $28 billion this year alone and over $100 billion through the next three years. According to Fortune, the company's Chief Financial Officer Wendell Huang has said the bulk of this spending will be directed toward TSM's most advanced processes, which are the 7nm, 5nm and 3nm chipsets.
This spending will likely help TSM keep its lead over smaller rivals like Samsung and Intel (INTC), who have recently announced big spending pushes into advanced chips.
Given that TSM is the leading chipmaker at a time when there's a shortage of semiconductors has made it a tad bit expensive, with a P/E ratio of 32.5. But those investors looking to take the plunge today are paid a growing dividend while they wait.
iShares Semiconductor ETF
- Assets under management: $6.8 billion
- Expenses: 0.46%, or $46 annually for every $10,000 invested
There's an ETF for everything these days. The semiconductor stocks are no different. And given the overall returns and importance of the industry to the modern world, this is one instance where thinking broadly could be a good bet.
The iShares Semiconductor ETF (SOXX) is the way to make that wager.
The SOXX recently underwent an index change to the ICE Semiconductor Index from PHLX SOX Semiconductor Sector Index, but the idea is still the same.
The ETF tracks a basket of 30 different semiconductor names, including chip designers, equipment manufacturers and foundries, providing a well-balanced and broad approach to owning the sector. All the stocks on this list are included in the fund, with NVDA the top holding.
And the ETF has a pretty successful history. Over the last 10 years ending in May, the SOXX has managed to return an average of 23.5% annually. Now, that was with its previously tracked benchmark, but the fund's current index has a very similar construction. The ETF's new index has done well, too. Year-to-date, the iShares Semiconductor ETF has returned nearly 20%.
The index switch was more of a way for iShares to lower its operation costs. Speaking of those costs, the SOXX has a low expense ratio of 0.46%.
In the end, for investors looking to play technology's backbone and add a dose of semiconductors to their portfolio, the iShares Semiconductor ETF is an easy, low-cost way to do just that.
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