If there’s one group of stocks that has been pretty volatile over the last year, it has to be semiconductor stocks. The chip makers have seen their fortunes rise on growing tech demand, only to see them fade away as the trade war waged on. It has truly been a wild ride for the iShares PHLX Semiconductor ETF (NYSEArca:SOXX) and stocks in the space.
But the new year could be full of gains for the semiconductor stocks.
For one thing, the announcement of the phase one deal between China and the U.S. is a major positive and removes arguably the biggest headache facing the sector. With the two nations now cooperating on trade, the chip makers should she their stars shine. According to the Semiconductor Industry Association, computer chips are the U.S.’s third-largest export. So, the deal is a net positive for the sector. Secondly, the semis are benefiting from rising tech adoption across all industries. With data centers, 5G and new gadgets becoming he norm even at your local burger joint, there’s plenty of runway left.
With that, semiconductor stocks could be one of the best plays for the new year. Investors looking for plenty of growth potential need to consider the major players.
Here are five semiconductor stocks that could be great picks in 2020.
Semiconductor Stocks to Buy: Nvidia (NVDA)
It’s easy to choose sector leader Nvidia (NASDAQ:NVDA) as a top semiconductor stock to own for the new year. That’s because NVDA continues to operate in some of the biggest trends and themes in tech. We’re talking about artificial intelligence and data center demand.
NVDA has long been a maker of graphics cards (GPUs) and processors. It turns out those chips are perfect for the rapid-fire computing power to make A.I. and data centers run fast and actually process all the needed information. After a slight slowdown — thanks to a large customer cutting spending due to the trade war — NVDA has once again started to see revenues for data center chips rise.
Last reported quarter, NVDA saw data chip demand jump nearly 11%. Meanwhile, continued advances in conventional A.I. are set to push those revenues further over the next few years as data centers are forced to upgrade. We can’t forget Nvidia’s purchase of Mellanox (NASDAQ:MLNX). That smart buy will add a hefty dose of interconnected technology to its offerings and make it a powerful player as overall data center demand picks up.
All of this — plus continued advances in self-driving cars and other uses for fast GPUs should help NVDA be a revenue machine over the new year. Next quarter alone, the firm expects to pull in roughly $2.95 billion in revenue, a year-over-year increase of over 34%.
It’s no wonder why the semiconductor stock recently received a big upgrade and new price target of over $270 per share. With so many ways to win, NVDA stock could be one of the top picks for investors.
Micron Technology (MU)
The last few quarters have not been so kind for Micron Technology (NASDAQ:MU). MU makes so-called analog chips. These are the boring semiconductors that are found in countless common household items. The problem is these analog chips are so standard, they actually trade like commodities. There’s a spot market for these chips just like a bushel of corn or barrel of crude oil. Thanks to a glut of these DRAM chips, prices have plunged and its crushed Micron’s bottom line.
But these days, it’s a different story for MU and that comes courtesy of 5G.
It turns out that the ramp-up to 5G devices will require a lot of both DRAM and NAND flash memory chips — the other specialty that Micron produces. Up to 50% more NAND memory than a 4G phone and an average of 6 GB worth of DRAM, in fact. This is a huge tailwind for Micron and could seriously reverse its fortunes in 2020. Right now, 5G device adoption is only getting started. There’s a long runway for its chips.
Meanwhile, the semiconductor stock has continued to expand into other higher-margin specialty chips, including those perfect for autonomous cars and A.I. Those chips allowed to see a rise in quarterly sales during he last reported quarter.
In the end, Micron may finally get its mojo back as 5G and its advanced semis start to win.
Texas Instruments (TXN)
Given the overall volatility of the semiconductor space, going with a proven stalwart could be the best way to play the sector in 2020. And you can’t go wrong with Texas Instruments (NASDAQ:TXN).
The beauty for TXN lies within its dual operating model. The firm is an analog chip superstar and produces tons of different basic chips for other manufacturers/end-users. Given its size, this produces plenty of cash flows for Texas Instruments — $6.1 billion as of last year. And it uses those cash flows smartly to help develop other more advanced chips. These days, T.I. has its hands in everything from self-driving cars, cloud computing and internet of things (IoT) applications. These advanced and higher-margin chips have continued to provide a boost to TXN’s bottom line and balance out issues with analog chip pricing.
The balance has helped investors as well. TXN has quickly become a dividend machine. Over the last 15 years, the semiconductor stock has managed to grow its payout by over 3,330%. That’s not a typo. Moreover, it has managed to increase its buyback programs and reduce its total share count by over 24%.
And while the issues with the trade war have hurt TXN’s revenues in the near term, the longer term is still rosy. The chipmaker recently reaffirmed its focus on higher-margin chips, manufacturing and IoT, which will benefit it over the next year or so. That could help keep its cash flows humming and its dividend growing.
With its near-3% yield, TXN could be a major bargain for the new year, especially if the volatility of the sector persists.
NXP Semiconductors NV (NXPI)
The new year could finally be the year that many new tech themes finally become mainstream. And that could seriously benefit Netherlands-based NXP Semiconductors NV (NASDAQ:NXPI).
NXPI is all about specialty chips and specifically it dabbles in a few of the biggest tech trends of all time. We’re talking chips for automotive, IoT, mobile and communications infrastructure. NXP is one of the biggest producers of chips needed for radar systems in cars for adaptive cruise control, self-guided parking and quickly self-driving vehicles. At the same time, the firm helped create near field communication chips (NFC) that are used in mobile-to-mobile payments. Add in all its efforts to connect devices like your fridge to the web and NXPI is the leading “future” semiconductor manufacturer.
The problem for NXPI is that sales have slumped in the face of the trade war and global economic slowdown. Last quarter, pretty much all segments saw a decline in revenues and the firm saw an overall profit dip.
However, with the trade war ending, management and analysts are bullish on NXPI’s prospects for the new year. Sales are expected to increase across several of its lines and the firm remains a top draw for many of the major tech trends. Meanwhile, NXPI stock can be had for a cheap 16x forward earnings and the firm continues to buyback stock and boost its dividend.
In the end, NXPI could be a top bet among the semiconductor stocks to play 2020 and the future.
Skyworks Solutions (SWKS)
The beauty of the 5G mega-trend is that there will be a lot of winners across all the equipment, devices and computing power needed to get it going. As such, Skyworks Solutions (NASDAQ:SWKS) is one of the biggest winners among semiconductor stocks so far that could keep going in 2020.
SWKS makes all sorts of chips and RF technology products that are needed for 5G to take hold.
This includes a hefty dose of chips for smartphones. Already having a huge supply deal with Apple (NASDAQ:AAPL), Skyworks is poised to make some serious bank as AAPL is set to launch three new 5G phones in 2020. And while, SWKS does rely on Apple for about half of its revenues, it has plenty of deals with other phone makers for 5G products. Unfortunately, in the near term, many of them are Chinese manufacturers like OPPO, Vivo, Xiaomi and even embattled Huawei. But as mentioned earlier, with the trade war thawing, SWKS could see its stars shine.
IDC estimates that total global 5G phone sales will clock in around 190 million units in 2020. And Skyworks should get some of that action. Given that its sales have suffered because of the trade war, any boost will be seen as a boon for the stock.
Now, shares of SWKs have surged this year based on this potential. However, shares of the semiconductor stock are still cheap, with a forward price-to-earnings ratio of 17. That still leaves plenty of growth potential as 5G ramps up in the new year.
For investors, Skyworks could be one of the best pure 5G plays among the semiconductor stocks.
At the time of writing, Aaron Levitt did not have a position in any stock mentioned.