The past year may have been a blockbuster one for semiconductor stocks. But, if you thought things would simmer down for this hot sector in 2021, think otherwise. Between the global chip shortage bolstering already strong demand, and the prospects for continued growth into the 2020s, things remain bright for this high-flying sector.
As demand remains strong, the competition is heating up. Whether we are talking about CPU chips, GPU chips or smartphone chips, the major players are battling for market share. Which contenders have a shot at victory? And which superstars today are going to get the short-end of the stick?
Admittedly, it may not be so “make or break.” Clearly, a few will stand out as clear winners in the battle for market share. But, expect the rising tide of demand to raise all boats. This may point to a rebound in major plays in this space, following February’s sell-off. Not only that, there’s potential for the sector to hit new highs this year as well.
So, which semiconductors stocks should you keep top of mind? Consider these seven industry leaders a great place to start:
- Advanced Micro Devices (NASDAQ:AMD)
- Broadcom (NASDAQ:AVGO)
- Microchip Technology (NASDAQ:MCHP)
- Micron (NASDAQ:MU)
- Nvidia (NASDAQ:NVDA)
- Qualcomm (NASDAQ:QCOM)
- Texas Instruments (NASDAQ:TXN)
Semiconductor Stocks: Advanced Micro Devices (AMD)
If you’re talking about “chip wars,” AMD stock is a name that comes to mind. A few years back, the company was an “also-ran” to Intel (NASDAQ:INTC) in CPUs, and Nvidia in GPUs. But, giving both a run for their money, the company has gained significant ground when it comes to market share.
Sure, as of late both rivals have started to fight back. Intel’s gaining lost ground. AMD has also given back some of its GPU market share gains to Nvidia. This may make it seem like the “story” behind this stock is fading. Yet, keep things in perspective. Yes, there’s a bit of ebb-and-flow going on with market share.
But, when it comes to overall growth, things remain solid for AMD stock. Revenues are predicted to grow around 37% in 2021. Gross margin is forecasted to soar 47% this year as well. With CEO Lisa Su herself calling the chip shortage “very good” for the company, 2021 may wind up another banner year for the chip powerhouse.
What about valuation? Admittedly, the strengths of Advanced Micro Devices are more than reflected in its current share price. This could result in a big contraction if tech stocks see a second sector-wide sell-off. Yet, while it may be wise to remain cautious, consider this a semiconductor stock to keep at the top of your watch list.
After challenges leading up to and during the initial stages of the Covid-19 pandemic, Broadcom has bounced back in a big way in the past few quarters. The communications chip maker saw its shares recover to pre-outbreak levels last summer. And, with surging chip demand, shares have trended sharply upward in the months since.
Trading for around $300 per share last June, AVGO stock changes hands at around $450 per share as of this writing. But, after its stunning run, could we see more gains as the year plays out? Based on recent quarterly numbers, it looks promising. Sure, chip sales came in slightly under estimates. Yet, results overall beat Wall Street expectations.
With the global chip shortage, 90% of its 2021 supply has already been ordered. Even as Broadcom carefully balances red-hot demand against the risk of oversupplying (an issue that preceded previous “chip gluts”), results in the coming quarters are set to be strong. Now, unlike AMD and Nvidia, strong demand doesn’t mean jaw-dropping sales growth this year.
Instead, expect 12.4% top line growth, and 21% earnings growth, for this fiscal year (ending October 2021). This may be a less exciting “growth story” compared to other segments of the chip market. But, with AVGO stock sporting a much more reasonable valuation (forward price-to-earnings, or P/E, ratio of 17.2x), there may be room for more big gains ahead, if the company can handily beat expectations.
Microchip Technology (MCHP)
After soaring over 110% in the past, can MCHP stock deliver strong returns again over the next 12 months? It’s no surprise investors have aggressively bid up this chip maker. With its key end user markets including the automotive and industrial sectors, consider this a recovery play among semiconductor stocks.
Yet, even if it looks like it’s strong performance has been overdone, there may be further gains ahead. Last summer, I made the case why Microchip Technology shares were a prime candidate for multiple expansion. Trading at a noticeable discount to peers, at the time I believed the stock had room to run. Even if it didn’t set the world on fire when it comes to growth.
Clearly, this prediction played out. The stock saw its forward multiple grow from 18.4x to 23.2x earlier this week, (though it has since pulled back to 19.6 as the market dropped). However, while the potential for further multiple expansion isn’t as great now, with shares still at a slight discount to rivals like Analog Devices (NASDAQ:ADI), which has a forward P/E of 24.6x, there may be room for this valuation to see another boost.
Coupled with projected double-digit earnings growth next fiscal year (ending March 2022), we may see less exciting, but still solid, share price growth for Microchip Technology. And, that’s not even taking into account the current demand for chips (especially in sectors like automotive) helping this company’s future results to come in well above estimates.
Going into the outbreak, Micron was an underappreciated chip stock. Even after its 90% surge since last year’s Covid-19 driven stock market crash, this maker of DRAM and NAND memory chips remains one of the more reasonably-priced names in this sector out there.
Now, there’s a good reason why investors are cautious when it comes to pricing in this chip play. In a more “feast or famine” segment of the sector, it makes sense to give this stock a more modest valuation (shares currently trade for 19x this fiscal year’s earnings, and 9.3x its estimated earnings for the next fiscal year).
Yet, even as it’s been strong in the past year, investors may be still factoring too much of its past issues into the MU stock price. As a Motley Fool commentator recently wrote, if the anticipated surge in demand for DRAM and NAND chips in the coming year plays out, this may be a worthwhile opportunity. While he’s a bit more on the fence, analysts at UBS are very confident this scenario will happen, as seen from their recent raising of their price target to $120 per share (the stock trades for around $83 per share today).
Largely dismissed by investors in 2019 and for most of 2020, Micron stock has made up for lost time. Things may look a bit overextended now. But, if positive developments continue to play out, this could continue to be one of the best performing semiconductor stocks.
As Covid-19 turned out to be a boon for data center and gaming chip demand, NVDA stock surged tremendously in the first few months of the “new normal.” But, like with the situation with AMD, investor enthusiasm cooled by the summer. But, with the stock trading sideways for the rest of 2020, before dipping during February’s sell-off, some may think the party’s over for this popular “story stock.”
Not so fast! As our own Matt McCall discussed March 11, consider this pullback a buying opportunity, not the beginning of the end for Nvidia. Demand for GPUs in the cloud and video game sectors isn’t going away after the outbreak. Neither are the other secular growth drivers at play for this powerhouse, including AV (autonomous vehicles), and AI (artificial intelligence).
In short, there’s plenty in motion to help Nvidia continue to grow at a healthy clip. What about the chip wars? As I mentioned above, the company has recaptured some of the market share lost to Advanced Micro Devices. And, as seen with what it revealed at January’s Consumer Electronics Show, the GPU powerhouse is again bringing its A-game, as the competition continues to heat up.
Some may have concerns about possible negative impact from the chip shortage. Supply shortages for its GeForce RTX 30 GPUs are expected through the third quarter. But, as shares remain relatively weak compared to last year’s strength, now may be the time to enter a position in NVDA stock.
For some semiconductor stocks, the chip shortage hasn’t been bad news. But, don’t tell that to Qualcomm. As InvestorPlace’s Joel Bagole wrote March 12, this maker of chips for the smartphone space has been hit hard by this development. This is on top of other issues that have affected the company, such as Apple’s (NASDAQ:AAPL) decision to bring smartphone modem development in-house, instead of using Qualcomm as its supplier.
Yet, even as investors have sold off QCOM stock in recent weeks (down around 26% from its 52-week highs), things aren’t all bad here. With CEO Steve Mollenkopf recently saying the shortage is starting to ease for certain chips, the recent shortage-related pullback in the stock may have been a bit overdone.
Outside of supply news, other factors look positive for Qualcomm. After years of litigation, the company may be in the clear with regards to the Federal Trade Commission’s antitrust suit against it. The agency isn’t likely to appeal the case to the Supreme Court. Shares may have already priced-in the company being out of the woods with this issue. But, with little chance it comes back to haunt it, more reason view this stock more positively than the market’s current sentiment.
Best of all, QCOM stock remains one of the most reasonably-priced semiconductor stocks out there. Trading for just 18x forward earnings, and much of the negativity surrounding it baked-in, a full rebound may be just around the corner.
Texas Instruments (TXN)
Like with Microchip Technology, TXN stock is a semiconductor stock with big exposure to the post-virus recovery. With exposure to “old economy” end-user markets like automotive and industrial, along with more tech-related sectors like communications and enterprise systems, the coming quarters could be strong for this analog integrated circuit maker.
Handily beating Wall Street estimates for the quarter ending Dec. 31, if this trend continues, Texas Instruments could come in on the higher end of 2021 Wall Street earnings consensus (earnings per share of $6.71). Sure, a lot of this is clearly priced into shares. At today’s prices (around $175 per share), the stock sports a forward P/E of 27.3x. Not too pricey, but not exactly “cheap.”
Fairly priced at today’s levels, does the stock have room for additional gains? Sure, there’s a negative flip side to end-users buying chips hand-over-fist due to supply worries. If it turns out sales slump massively in subsequent quarters, as buyers have locked their supply now instead of later, investors in this stock could be in for disappointment.
This was a concern brought up by analysts when Texas Instruments released results back in January. A pullback would provide a more opportune entry point. Yet, much remains on its side. A continued move to $200 per share may be possible.
On the date of publication, Thomas Niel did not (either directly or indirectly) hold any positions in the securities mentioned in this article.
Thomas Niel, a contributor to InvestorPlace, has written single stock analysis since 2016.