Best 5 Semiconductor Chip Stocks to Invest in

At the beginning of the year, most semiconductor stocks were expected to rally amidst their growing demand. However, several emerging factors hindered their growth. For instance, the Russia-Ukraine war caused supply chain bottlenecks for a majority of commodities. Worse, China’s zero-COVID policy led to lockdowns in cities where these chip-making factories are situated, causing further strain on the global supply chain. Elsewhere in the US, the Fed is affecting numerous rate hikes this year, which has caused the 10-year Treasury yields to rally whilst tech stocks plummet.

Trends that drive semiconductor stocks

Semiconductors are used in the manufacture of computer chips, which have several applications in today’s world. For one, the recent rollout of 5G has created an increasing demand for these chips. What’s more, the current trend in the automotive industry of transitioning towards electric vehicles has proved another catalyst in this growth in demand. Another major application driving this demand is their use in computing accelerators. These include GPUs and other advanced processors, which are utilized in gaming as well as in crypto mining.

According to the Semiconductor Industry Association (SIA), half of the $420 billion in total semiconductor spending in 2020 came from the US. Today, these chips are the industrial giant’s fourth-largest export. Therefore, despite its hurdles, the semiconductor industry has all the markers for exponential growth, and it is only a matter of time before investors start smiling at the bank. In the meantime, below are the top 5 stocks worth investing in.

Skyworks Solutions (SWKS)  

This is a manufacturer that deals in connectivity chips, which bring about the majority of their sales revenue. These chips are mostly used in cellphones, and the company has positioned itself nicely as Apple’s key supplier. Though the smartphone boom has brought a lot of business their way in recent years, the company is transitioning into other avenues. These include making chips for Internet of Things applications, Wi-Fi, and 5G connectivity. 

Notably, the company has had a special focus on connected devices. These range from smart devices used in homes to connected heavy industrial equipment, even vehicles. In addition, their foray into manufacturing 5G equipment has seen them boost their sales revenue from their smartphone-related business. Recently, Skyworks acquired the network and automotive division of Silicon Labs, which has seen them diversify their income sources.   

Nvidia (NVDA)

This is a household name and market leader in the manufacture of GPUs. In the beginning, these GPUs were designed for gamers, but their increased use by miners has only served to bring Nvidia more business. Other than hardware, the company also boasts a wide software library, as well as a cloud computing solution. The latter helps their clients use Nvidia chips for artificial intelligence, machine learning, self-driving cars, and a host of other applications. The company is also foraying into providing software solutions for their business clients. 

In 2020, the company acquired Mellanox, a data center networking and connectivity company. They also acquired ARM Holdings, a chip design licensor, though this acquisition has faced some regulation hurdles. Be that as it may, Nvidia is using ARM designs to venture into other parts of the modern data center, such as CPU manufacture. 

Intel Corporation (INTC)

Intel is a globally renowned name among semiconductor manufacturers. Their fame can be attributed to their x86 microprocessor series, which can be found in most CPUs. In addition, they expanded their investment to other chip applications such as the Non-Volatile Memory Storage Group. In 2017, they acquired Mobileye, a market leader in computer vision used in self-driving cars. In fact, the company is in plans to take Mobileye public in the US. 

In March, Intel announced plans to invest in the EU over the next decade. They began this by investing in an $18.7 billion chip-making site in Germany. They also intend to spread their manufacturing hubs to France, Ireland, Italy, Poland, and Spain. With this move, Intel is poised to create a balanced and resilient supply chain, tackling the biggest issue causing chip shortages today. 

Taiwan Semiconductor Manufacturing Company Ltd (TSM)

As of the time of writing, TSM is the largest semiconductor manufacturer by market cap, having just recently toppled Nvidia from the top position. Notably, the company majorly manufactures these chips on contract for others; thus, its business model is not in the design of new chips. 

Regardless, being the largest semiconductor foundry has brought them plenty of business, especially now as the world faces a semiconductor shortage. This is because most companies looking for supplies to manufacture these chips have had to turn to TSM, which has translated into more sales revenue. Though they raised prices significantly in 2022 in the face of growing demand, they are still planning to raise prices again next year if the shortage persists. 

Texas Instruments Inc. (TXN)

This is an analog chip manufacturer that has been posting strong earnings reports. However, its stock has been in a downtrend for most of the year, which can be attributed to the tough market conditions for chip manufacturers. The company is also planning to spend large on new equipment and other items, which makes investors uneasy. This is a drastic change in tactic as in the past, to ensure free cash flow, they repurchased their stock from investors. This has seen their share count reduce by 46% since 2004. However, Texas Instrument’s long performance in the industry leads us to believe that its stock is currently undervalued. Besides, their focus on analog chips means they do not face much competition in the current market.  

Summary

With the world increasingly transitioning into a digital economy, semiconductors are the building blocks of all devices and technologies that are seeing widespread use. However, owing to the difficult political environment in Europe, coupled with China’s lockdown measures, there have been global supply chain interruptions. This has caused a shortage of these semiconductors, despite their growing demand. Though most semiconductor stocks are struggling right now, the market is well-positioned for exponential growth over the coming years.