Chip stocks have seen significant returns in the final quarter of 2021. Despite volatility in the broader markets, the semiconductor industry continues to expand at a rapid pace. For instance, Nvidia (NASDAQ:NVDA) gained over 25% over the past month, while Advanced Micro Devices (NASDAQ:AMD) surged 20% and Qualcomm (NASDAQ:QCOM) added 30%.
Wall Street highlights chip stocks constitute a perfect way to boost investor portfolios with many companies riding on a global chip shortage. And recent metrics show us why: the semiconductor market should expand over 17% in 2021 compared to 10.8% in the previous year.
Strong tailwinds support chip stocks as semiconductors are necessary in a broad spectrum of established and emerging technologies. We find chips in wireless products, 5G technologies, household consumer items, artificial intelligence (AI), the Internet of Things (IoT), the metaverse and electric vehicles (EVs). With most industry companies reporting record revenues so far in 2021, top chip stocks undoubtedly deserve investor attention.
JPMorgan (NYSE:JPM) points out that the current global chip shortage could improve in mid-2022 as more supplies become available. Meanwhile, tech giants like Apple (NASDAQ:AAPL), Amazon (NASDAQ:AMZN), Meta Platforms (NASDAQ:FB) and Tesla (NASDAQ:TSLA) are all working to bring certain features of chip production in-house. Moreover, JPMorgan forecasts that the fragmentation in the high-end computing space could lead to faster growth in the industry.
With that backdrop, here are seven top chip stocks with explosive upside potential in 2022 and beyond.
- Advanced Micro Devices
- Broadcom (NASDAQ:AVGO)
- iShares Semiconductors ETF (NASDAQ:SOXX)
- ON Semiconductor (NASDAQ:ON)
- Skyworks Solutions (NASDAQ:SWKS)
Chip stocks to Buy: Advanced Micro Devices (AMD)
52 week range: $72.50 – $164.46
Santa Clara, California-based Advanced Micro Devices develops computer processors for the consumer and business markets. Most of the revenue comes from central processing unit (CPU) and graphics processing unit (GPU) sales to the personal computer and data center markets.
AMD benefits significantly from the long-term growth in gaming hardware sales. The company provides the chips used in the latest game consoles, such as Sony’s (NYSE:SONY) PlayStation and Microsoft’s (NASDAQ:MSFT) Xbox.
Management released Q3 results on Nov. 3. Revenue increased 54% year-over-year (YOY) to $4.3 billion. On a non-GAAP basis, net income came in at $893 million, or 73 cents per diluted share, compared to $501 million, or 41 cents per diluted share, in the prior-year quarter. Cash and short-term investments ended the quarter at $3.6 billion.
On the results, CEO Dr. Lisa Su remarked, “AMD had another record quarter as revenue grew 54% and operating income doubled year-over-year. 3rd Gen EPYC processor shipments ramped significantly in the quarter as our data center sales more than doubled year-over-year.”
Going forward, the chip group is expected to gain more market share from Intel (NASDAQ:INTC) in PC and server markets. Bank of America (NYSE:BAC) expects AMD to have 25% of the server market by the end of 2022. In addition, Meta Platforms recently chose the chip name to provide the chips that its data centers will need to power the metaverse.
AMD shares hover at $164, up 78% year-to-date (YTD). They do not look cheap, trading at 49 times forward earnings and 13.4 times trailing sales. Interested readers could regard $150 or even below as a better entry point.
52 week range: $398.10 – $577.21
Dividend Yield: 2.63%
San Jose, California-based Broadcom generates around 75% of its revenue from its semiconductor business and the rest from infrastructure software solutions. The tech group has been benefiting from the 5G revolution in smartphones.
Broadcom released fiscal Q3 numbers in early September. Total revenue came in at $6.78 billion, up 16% YOY. Non-GAAP net income soared 28% YOY to $3.12 billion, or $6.96 per share. Free cash flow during the quarter increased 11% YOY to $3.43 billion. Cash and equivalents ended the period at $11.1 billion.
After the announcement, CEO Hock Tan said, “Broadcom delivered record revenues in the third quarter reflecting our product and technology leadership across multiple secular growth markets in cloud, 5G infrastructure, broadband, and wireless.”
Management anticipates Q4 revenue to reach $7.35 billion, implying a 14% YOY increase. Analysts highlight that the software business provides revenue diversification while contributing to robust cash flows.
With a history of double-digit dividend growth, AVGO appeals to both growth and income investors. The stock currently trades at $560 territory, up 28% YTD. Shares offer investors a more reasonable valuation relative to its peers, trading at 18 times forward earnings and nine times trailing sales.
AVGO stock’s 12-month median price target is $575. Therefore, a potential decline toward $525 would improve the margin of safety before hitting the buy button.
Chip stocks to Buy: iShares Semiconductors ETF (SOXX)
52-week range: $363.61 – $548.12
Dividend yield: 0.61%
Expense ratio: 0.43%
Our next discussion is on an exchange-traded fund (ETF), namely the iShares Semiconductors ETF. It offers access to 30 U.S. semiconductor companies. SOXX started trading in July 2001.
Among the leading names on the roster are Nvidia, Broadcom, Intel, Qualcomm, Texas Instruments (NASDAQ:TXN), and Advanced Micro Devices. The top ten names comprise over 55% of net assets of $9.44 billion. In other words, it is top heavy.
SOXX currently hovers at $535 territory. It is up 41% YTD and about 50% over the past year. Price-to-earnings (P/E) and price-to-book (P/B) ratios stand at 34.42 and 7.31, respectively. The ETF could appeal to a range of readers who want to have a concentrated exposure to the industry stateside.
52 week range: $115.67 – $346.47
Dividend yield: 0.05%
Santa Clara, California-based Nvidia is the leading designer of GPUs used in various end markets, such as high-end PCs for gaming, data centers and automotive infotainment systems. Additionally, the manufacturer is a top choice for chips geared for AI markets and cryptocurrency mining.
Nvidia announced Q3 FY22 results on Nov. 17. Revenue increased 50% YOY to a record $7.1 billion, fueled by record revenue in the gaming and data center businesses. Non-GAAP net income came in at $2.97 billion, or $1.17 per diluted share, up 60% YOY from $1.83 billion, or 73 cents per diluted share, a year ago. Cash and equivalents ended the period at $1.29 billion.
CEO Jensen Huang remarked, “The third quarter was outstanding, with record revenue. Demand for NVIDIA AI is surging, driven by hyperscale and cloud scale-out, and broadening adoption by more than 25,000 companies.”
Nvidia also continues to expand its library of cloud-based subscription software and services. Its acquisition of the U.K.-based ARM Holdings, a designer of chips for mobile phones, from Softbank (OTCMKTS:SFTBY) in a deal worth $40 billion is pending regulatory approval.
Despite gaining over 146% YTD, analysts highlight NVDA stock remains a buy with a 12-month price target of $350. It currently hovers at $320. Shares are trading at 65 times forward earnings and 35 times trailing sales. A potential decline toward $300 could offer a better entry point.
Chip stocks to Buy: ON Semiconductor (ON)
52 week range: $28.74 – $64.04
Phoenix, Arizona-based ON Semiconductor is a leading supplier of power and analog semiconductors. It operates its own foundries, building chips that include image sensors and system-on-chip (SoC) solutions. Management currently focuses on automotive and industrial end markets.
On Semiconductor released solid Q3 results in early November. Record revenue of $1.74 billion was up 32% YOY. Fueled by strong gross profit margin, non-GAAP net income came in at $380 million, or 87 cents per diluted share, a steep increase compared to last year’s $112 million, or 27 cents per diluted share. Cash and equivalents ended the period at $1.4 billion.
After the announcement, CEO Hassane El-Khoury remarked, “We delivered another quarter of record results driven by on-going execution of our new strategy with demand remaining strong for our intelligent power and sensing solutions in the automotive and industrial end-markets.”
Management anticipates Q4 sales to reach $1.74 billion to $1.84 billion. Meanwhile, analysts are bullish on the recent acquisition of GT Advanced Technologies.
ON stock is hovering at $60 territory, up 87% YTD. Shares are trading at 19 times forward earnings and 4.2 times trailing sales. The 12-month median price target is $64. A potential decline toward $58 in the short-run would make ON stock more attractive.
52 week range: $122.17 – $188.77
Dividend yield: 1.55%
As the largest wireless chip provider worldwide, the San Diego, California-based Qualcomm is a leader in 5G network technology. Regular InvestorPlace.com readers would know that Qualcomm has been a key supplier for Apple.
However, Apple has decided to drop Qualcomm and develop its chips in-house. Yet, despite the decline in sales to Apple, Qualcomm predicts high growth in chip sales for autonomous cars as well as other connected devices.
Qualcomm announced Q4 results on Nov. 3. Non-GAAP revenue increased 43% YOY to $9.34 billion. Non-GAAP net income came in at $2.9 billion, or $2.55 earnings per diluted share, up 76% YOY from $1.7 billion in the prior-year quarter. Cash and equivalents ended the quarter at $7.1 billion.
After the announcement, CEO Cristiano Amon remarked, “As of fiscal 2021, we are exceeding our 2019 Analyst Day targets for revenue growth and diversification and operating margin expansion, while more than doubling our year-over-year Non-GAAP EPS.”
QCOM stock is around $180, up 19% YTD. Shares are trading at 16.6 times forward earnings and 6 times trailing sales. The 12-month median price target is $200. Potential investors could consider buying around $165.
Chip stocks to Buy: Skyworks Solutions (SWKS)
52 week range: $137.94 – 204.00
Dividend Yield: 1.45%
Irvine, California-based Skyworks Solutions offers semiconductors, especially for wireless handsets, a segment with high profit margins. Its main products include power amplifiers, filters and switches that support wireless transmissions. They can be found in connected devices ranging from “smart” appliances to industrial machinery and vehicles.
Skyworks released its Q4 and full-year results on Nov. 4. Record revenue of $1.31 billion was up 37% YOY growth. Non-GAAP net income surged 42% YOY to $439 million, or $2.62 per diluted share, up from $312 million, or $1.85 per diluted share, in the prior-year quarter. Cash and equivalents ended the period at $883 million.
On the metrics, CEO Liam K. Griffin said, “Skyworks set new records for revenue and earnings for the fourth quarter and the fiscal year, delivering significant year-over-year growth in response to robust demand across our expanded product portfolio.”
The mobile business generated 71% of its revenue last quarter, up 40% YOY. Strategy Analytics estimates that global mobile phone sales will grow over 9% in 2021, mostly driven by 5G smartphone sales. Since Skyworks is a key supplier for Apple, analysts see tailwinds from iPhone’s dominant position in the 5G space.
SWKS stock hovers at $150 territory. It is down only 1% YTD. Given its impressive long-term growth potential, SWKS stock looks undervalued, trading at just 13 times forward earnings and 5 times trailing sales. The 12-month median price target is $210.
On the date of publication, Tezcan Gecgil held both a LONG and SHORT position in NVDA stock. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.
Tezcan Gecgil, Ph.D., has worked in investment management for over two decades in the U.S. and U.K. In addition to formal higher education in the field, she has also completed all three levels of the Chartered Market Technician (CMT) examination. Her passion is for options trading based on technical analysis of fundamentally strong companies. She especially enjoys setting up weekly covered calls for income generation.