Top Semiconductor Stocks: How to invest in this sector

written on June 15, 2021

As technology has advanced by leaps and bounds, semiconductor chips have spread from computers, fighter jets and cars to kitchen appliances, mobile devices and many other products. Powering technologies that enrich the lives of consumers and making businesses large and small run smarter, faster and more efficiently, semiconductors are also underpinning massive emerging trends like cloud computing, 5G wireless networks and artificial intelligence (AI).

According to the Semiconductor Industry Association (SIA), global semiconductor industry sales topped $40 billion for the month of January 2021, an increase of 13.2% over January 2020’s total of $35.3 billion and 1.0% more than the December 2020 which marked $39.6 billion. But challenges remain as attested by the global semiconductor shortage that has inundate news reports as of recently. The auto industry has been greatly affected by the global shortage, but as demand for chips is continuing to outstrip supply, car makers are no longer the only companies feeling the pinch. Surprisingly, as the global shortage rages on, a number of chip giants like Nvidia (NVDA), AMD (AMD) and others have seen their revenues surge to a record high.

Here we delve deeper into these top semiconductor stocks.

What has caused the semiconductor shortage?

In 2019, the global semiconductor industry suffered its worst year in almost two decades with revenue falling 12% to $412 billion according to the World Semiconductor Trade Statistics. Then in 2020, the industry returned to growth despite disruptions from the COVID-19 pandemic, which drove people around the world to find new ways to work and play.

Forced to temporarily shut their production lines down and anticipating a market slowdown that would last for months, car makers cancelled orders for chips used in car electronics systems like driver assistance and navigation control. In turn, chip foundries reassigned their spare production to companies making smartphones, laptops and gaming devices which were experiencing a surge in demand due to the various lockdowns. However, the car industry bounced faster than anticipated, sending semiconductor supply into a downward spiral and creating a shortfall in a wide range of industries.

With this scarcity not expected to end any time soon, countries such as the U.S., China and Europe have embarked on programmes to make their chip supply chains more resilient to outside shocks or geopolitical events. For instance, US President Joe Biden is pushing to bring more chip manufacturing back on U.S. soil as part of his multi-trillion-dollar infrastructure programme, while in China, the country’s top leadership has made self-sufficiency in chips a national goal.

Fun fact:

This is not the first semiconductor shortage we’ve experienced. A similar supply chain shock hit car makers 10 years ago when the Fukushima earthquake damaged wafer fab operations at Renesas Electronics, the top third supplier of car chips, while back in 1997, an unusually high demand of the Tamagotchi digital pets – an egg-shaped keychain computing device made by Japanese company Bandai – soaked up semiconductor capacity in Taiwan and triggered shortages that spilled over to other sectors.

Top semiconductor stocks

Below is a rundown of the leading semiconductor companies and why you should consider adding their stock to your portfolio.

Taiwan Semiconductor Manufacturing Company Ltd

One of Taiwan’s largest companies and the world’s most valuable semiconductor company, the Taiwan Semiconductor Manufacturing Company was founded in 1987 by Morris Change. Since its inception, it has been on a constant race to expand and upgrade its manufacturing capacity depending on the demand cycles of the semiconductor industry. For instance, in 2011, it planned to increase its research and development expenditures by almost 39% to New Taiwan Dollar (NT$) 50 billion, while it expanded capacity by 30% to meet strong market demand. At the same time, many top-notch fabless semiconductor names such as Advanced Micro Devices (AMD), Apple (AAPL), Qualcomm (QCOM) and others are its customers. Its success pushed the company to the top, surpassing rival Intel’s (INTC) market cap in 2017 for the first time, hitting $168.4 billion when compared with Intel’s $165.7 billion.

With a global capacity of about 13 million, 300 mm-equivalent wafers per years as of 2020, the company makes chips for customers with process nodes from 2 micron to 5 nanometres. In 2020 alone, it deployed 281 district process technologies, while it manufactured 11,617 products for 510 customers by providing broadest range of advanced, specialty, as well as advanced packaging technology services. But as the company and the rest of the foundry industry are exposed to the highly cyclical nature of the semiconductor industry, how has Taiwan Semiconductor Manufacturing Company fared so far? Its 2020 net revenue grew 25.2% year-over-year according to the company’s January 14 earnings released. On the other hand, net revenue came in at NT$1.34 trillion compared with the NT$1.07 trillion reached in 2019.

And at a time of shortages and superpower competition over new technology, the company is set to remain dominant in chip production as it continues to pour additional sums of money into expanding its dominance. In November of 2020, officials in Phoenix, Arizona approved its plan to build a $12 billion chip plant in the city. The semiconductor factory or ‘fab’ as it has been dubbed, is likely to be three times larger than originally announced, with the first phase consisting of a total of 3.8 million square feet of building.

As for its stock, TSM was listed on the Taiwan Stock Exchange in 1993, whereas in 1997, it became the first Taiwanese company to be listed on the New York Stock Exhange (NYSE). Since 1994, the stock has had a compound annual growth rate (CAGR) of 17.4% in revenue and 16.1% in earnings.

Buy Taiwan Semiconductor Manufacturing Company (TSM) stock today.

Nvidia Corp

Revolutionising the way consumer electronics work and kicking off the race for more realistic-looking computer graphics, Nvidia is known for making graphic design processing units (GPUs), a mainstay throughout the computer industry. However, its technologies do not stop here. From electric and autonomous driving to the datacentre and cloud, graphics, artificial intelligence (AI) and machine learning, the company’s list of products and services are used across multiple sectors.

As people across the globe social distanced themselves for much of 2020, the demand for graphics cards soared. In fact, Nvidia has enjoyed soaring profits and revenue particularly amid the surge in gaming and cloud computing. At the same time, the cryptocurrency boom also increased demand for the company’s semiconductor chips which are used by digital currency miners. On Friday May 28, 2021, NVDA stock climbed 5% thanks to investors’ optimism on its growth prospects, as well as the company’s revenue results which beat analysts’ expectations. For the first quarter ended May 2, Nvidia reported a record revenue of $5.66 billion, up by a whopping 84% from a year earlier and up 13% from the previous quarter. The record revenue came in mainly from its Gaming, Data Centre and Professional Visualisation platforms. GAAP earnings per diluted share for the quarter stood at $3.03, up 106% from a year ago and up 31% from the previous quarter. Its stock has also outperformed the broader market over the past year, with shares providing a total return of 79.7% over the past 12 months, well above the S&P 500’s total return of 40%.

But as a fabless chipmaker that actually outsources its chipmaking to other companies, could the global chip shortage spell potential trouble? When considering Nvidia’s gross margin, a key metric that is calculated as total revenue minus cost of goods sold, this has consistently trended higher since 2017. As a result, its stellar financials and impressive performance, coupled with expectations that this rapid growth should persist well into the second quarter, Nvidia is certainly a top share with enormous growth potential.

Add Nvidia (NVDA) to your portfolio or read our article about Nvidia here.

ASML Holding

A Dutch multinational company that specialises in the development and manufacturing of photolithography systems, as well as machines for the production of integrated circuits, ASML was established after a joint venture between Advanced Semiconductor Materials International (ASMI) and Philips back in 1984. Used in the production of computer chips, the company’s photolithography machines allow patterns to be optically imaged onto a silicon wafer that is covered with a film of light-sensitive material. In this manner, the $275 billion maker of photolithography equipment powers the laser etching of semiconductor integrated circuits (ICs) and top chipmakers to mass produce patterns on silicon.

After decades of tireless innovation and with competitors like Canon and Nikon hot on its heels, ASML is now in a position to reap the rewards, soaring from a 2018 peak of $12.9 billion to a projected $21.85 billion this year, a 36% growth in 2021. For its fourth quarter 2020, sales came in at €4.3 billion with a net income of €1.4 billion, whilst net booking amounted to €4.2 billion.

Listed on both the Amsterdam Exchange Index (AEX) and the Nasdaq, the stock which is a component of the Euro Stoxx 50 and the Nasdaq 100, is over 100% so far this year after the company closed at $675.47 on Friday, May 28, while it has rallied approximately 460% over the past five years. And based on the most recent data, ASML has returned 36.37% so far this year.

But there’s more room for growth. With an EPS for the quarter ending March 31, 2021 at $3.86 - 276.02% increase year-over-year, ASML’s prospects for the future appear to be pretty good.

Add ASML Holding (ASML) to your portfolio today.

Intel Corp.

An integrated device manufacturer that designs and manufactures motherboard chipsets, network interface controllers and integrated circuits, the company’s initial products included memory chips, such as the world’s first metal oxide semiconductor, whereas today, Intel creates processors for a variety of computer and technology companies like the likes of Lenovo (LNVGY) and Dell (DELL).

Intel generated $77.87 billion in revenues in 2020, with its Client Computing Group (CCG) accounting for 51.4% of that revenue, however, its stock has lagged behind when compared to its peers, tumbling 5.3% on April 22 following news that despite handily beating Wall Street’s first-quarter targets, its second-quarter earnings guidance was disappointing. Nonetheless, it’s important to remember that Intel has an enormous R&D budget, has been an excellent cash flow generator, while it has enjoyed decades of dominance in its main area of business. According to analysts, the stock’s 1-year trailing total return is that of 34.1%, while it has 15.6% market share last year. Its chip revenue also rose 3.7% year-over-year as the market for central processing units for PCs and servers was robust.

More recently, the company has decided to gradually reduce its dependence on its PC-centric business and to move instead into AI and autonomous driving. In fact, the company’s data-centric business accounted for 48.6% of 2020 revenues, a reflection that this business segment has the potential to offer significant returns in the near future. At the same time, Intel is positioned at the very heart of several technological advancements, such as the 5G network transformation and the rise of the intelligent edge. With silicon and software driving these inflections, Intel is set to deliver the technology needed.

Interested to invest? Here is how you can add Intel Corp (INTC) to your portfolio.

Broadcom

With roots in the rich technical heritage of AT&T/Bell Labs, Lucent and Hewlett-Packard/Agilent, Broadcom is a U.S. designer, developer, manufacturer, as well as global supplier of a wide range of semiconductor and infrastructure software products which serve the data centre, networking, software, broadband, wireless, as well as storage and industrial markets. With a long history of corporate transactions with other prominent corporations predominantly in the high-technology space, the company was formed when Avago Technologies Limited acquired the Broadcom part of the then Broadcom Corporation back in January 2016.

Combining its global scale and its engineering depth, with its diverse product portfolio and its top-notch semiconductor and infrastructure software solutions, Broadcom has grown into a successful and leading enterprise. In its last earnings results on March 3, 2021, the company reported $6.61 EPS for the quarter, beating the consensus estimate of $6.56 by $0.05, whilst revenue for the quarter came in at $6.66 billion compared to the expected estimate of $6.61 billion, marking a 13.6% increase on a year-over-year basis.

What’s more, Broadcom paid $1.3 billion in dividends in each of the first three quarters of 2020, while its dividend yield at 3.05% is highly attractive. The company was able to carry out these dividend payments thanks to its robust free cash flow which has risen consistently over the past year and as any savvy investor knows, cash is the lifeblood of any business.

Set to benefit from the rising demand for wireless chips across multiple industries, Broadcom remains a solid long-term investment for the booming semiconductor market.

Add Broadcom (AVGO) to your portfolio today.

Qualcomm

Headquartered in San Diego, California, Qualcomm was founded in July 1985 by seven former Linkabit employees led by Irwin Jacobs. Originally, the company centred on CDMA (Code Division Multiple Access) wireless cell phone technology research and eventually its patent was incorporated in the 2G standard. Over the years, Qualcomm has gone from selling semiconductor products in a fabless manufacturing model and developing semiconductor components and software for cars, laptops, wi-fi, watches, smartphones and other devices to creating semiconductor, software and services related to wireless technology. It also owns patents which are crucial to the 4G, 5G and other mobile communication standards.

Thanks to its drive to innovate, the company has branched out into the autonomous and self-driving cars industry. It bought the wireless electric car charging company HaloIPT, which it later on sold to WiTricity and it introduced its Snapdragon system-on-chips and the Gobi modems, as well as other software and products for self-driving cars and modern in-car computers. In 2000, it formed a joint venture with Ford called Wingcast, which aimed to create telematics equipment for cars. The partnership may not have materialised, however, the company is in the right position to tap into this burgeoning industry.

Wondering where the stock is headed? The COVID-19 pandemic saw a drop in demand for smartphones, however, sales have since recovered and thanks to the global rollout of 5G, the company’s sales have jumped. According to second-quarter 2021 results, revenue stood at $7.9 billion, up from $5.2 billion in the same period last year, partly thanks to a 55% rise in chipset sales. Meanwhile, operating income increased from $991 million to $2.17 billion over the same period which gave its EPS a boost, from $0.41 to $1.53. As for its stock, this has risen from its March 2020 low of $61 to $134.55 as of June 1, 2021. It’s also up almost 50% from the level it was before the pandemic. As lockdowns continue to be lifted and the 5G rollout is well underway, Qualcomm is set to benefit from this boom even further.

Buy Qualcomm (QCOM) stock here.

Advanced Micro Devices (AMD)

From a Silicon Valley startup established in 1969 with just a dozen employees working on leading-edge semiconductor products, Advanced Micro Devices or AMD, has grown into a global company which develops high-performance computing and visualisation products amongst which include microprocessors, motherboard chipsets, embedded processors and graphics processors for a range applications like servers, workstations, personal computers and embedded system applications.

The company has had an amazing turnaround over the past five years, moving from the brink of bankruptcy to becoming a fast-growth chip stock and as a result, its stock has also climbed. In January 2017, the stock was trading at around $11.35, but since then it has consistently been on the ascend. During the March 2020 lows AMD was at $39.61 per share, but by the end of the year it was trading at $95.92.

What makes AMD such an attractive investment? For one, the chipmaker has been delivering consistently great results and last year has been no different, blowing past estimates in both revenue and earnings. Indeed, for the full year 2020, the company reported revenue of $9.76 billion, with diluted EPS at $2.06. And as for 2021, AMD was expecting 37% revenue growth, but it eventually increased its full-year revenue growth forecast to 50% due to robust demand across all its businesses. Revenue for the first quarter of 2021 was $3.45 billion, up a staggering 93% year-over-year, while diluted EPS was $0.45.

AMD’s computing and graphics business has benefitted from an increase in PC demand, driving sales of its Ryzen CPUs and Radeon GPUs. On the other hand, the notebook market offers immense possibilities. The company has been delivering record mobile processor revenue for six consecutive quarters and this trend is likely to continue in the coming quarters.

Head over to Moneybase Invest to add Advanced Micro Devices (AMD) to your portfolio.

How to invest in semiconductor stocks

Ready to buy a share of these top semiconductor stocks? Your first step to tapping into a world of investment opportunities with Moneybase Invest is to sign up and open an account.

  • Download the app from either Google Play or the Apple App Store. Alternatively, you may access Moneybase Invest on your desktop by visiting https://live.cctrader.com/
  • Once you’ve onboarded successfully and have funded your account, head over to the search bar at the top of your screen and input either the company name or ticker symbol.
  • Select the instrument of your choice from the list and then click on the Buy button on the window located at the bottom of your screen.
  • On the New Order page, input the number of shares you would like to purchase and hit the Place Buy Order. The stock has been added to your portfolio.


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The contents of this article are not intended to be taken as a personal recommendation to invest but strictly based on research and for information purposes only. Retail investors should contact their financial adviser for a suitability assessment prior to taking any investment decisions.

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Life’s full of mysteries. Your money shouldn’t be one of them.