- Nvidia (NVDA) — Best-in-breed chipmaker involved in multiple industries and sectors.
- Advanced Micro Devices (AMD) — A stock I like to call “Mini-Nvidia.”
- Broadcom (AVGO) — Strong cash flows and steady demand. Big supplier to Apple (AAPL).
- Qualcomm (QCOM) — Also a supplier to Apple and generating solid growth in its mobile segment.
- ON Semiconductor (ON) — One of the best-performing semiconductor stocks with the strongest relative strength.
- Intel (INTC) — Long-time, well-known chipmaker with a solid dividend and low valuation. May work with Nvidia.
- Applied Materials (AMAT) — Produces the equipment semiconductor companies need.
Semiconductor stocks are playing a bigger and bigger role in everyday society. From the equipment that powers smartphones and computers to the hardware that makes supercomputing, datacenters and artificial intelligence a reality, this group serves an integral role in today’s world.
We’re already seeing the impact of the chip shortage. Intel (NASDAQ:INTC) and Nvidia (NASDAQ:NVDA) are talking about collaborating to ease the problem. General Motors (NYSE:GM) said it will idle production at one of its truck plants for about two weeks because of the shortage.
And of course, the Russian invasion of Ukraine is an ongoing risk, too — not just to the broader market, but especially semiconductor stocks. For instance, consider that Ukraine “supplies more than 90% of the U.S.’s semiconductor-grade neon.”
Semiconductors used to be much more cyclical than they once were. But now, they play such an important role in so many different industries that they have become more secular in nature.
|AMD||Advanced Micro Devices||$118.87|
Nvidia is one of my favorite stocks and has been for several years. Why? Simply put, CEO and co-founder Jensen Huang continues to deliver the goods. Nvidia’s two largest strengths are making best-in-quality products and being involved in a ton of industries.
Whether it’s cryptocurrency mining, automotive and autonomous driving or artificial intelligence and machine learning, Nvidia’s chips are needed. The company’s products are also in high demand for the cloud, supercomputers, robotics, drones, the metaverse and datacenters.
It dominates in multiple industries, and while it’s subject to the ups and downs of the economy and business cycles, there will be a near-constant demand from these industries over the long term.
Nvidia is at risk of a supply chain problem if geopolitical issues continue to deteriorate. However, I think long-term bulls can sleep well at night knowing the type of growth and quality this company continues to deliver.
Advanced Micro Devices
I like to think of Advanced Micro Devices (NASDAQ:AMD) has a mini-Nvidia. It doesn’t generate the types of margin and free cash flow Nvidia does, but CEO Lisa Su and the rest of AMD’s management team has done a tremendous job with this company.
As a result, the stock has gone from a low below $2 in 2016 to a high of $164 in late 2021. Some may say that’s an example of a bubble or some other exuberance. I say the long-term trends favor the bulls and AMD has done tremendous work to become a premium chipmaker.
The company has slashed its debt, flipped its free cash flow from negative to positive and increased its margins. Don’t even get me started on earnings and revenue. Consensus expectations on these two measures have long been too conservative, and not by a small amount.
Analysts have been woefully low on their forecasts as AMD has continued to beat expectations.
Furthermore, I don’t see irrational exuberance here. Shares trade at just under 30 times this year’s earnings, which are forecast to grow more than 40%. That’s on top of significant revenue growth estimates.
If you like Nvidia over the long-term, it’s hard not to like AMD.
If you like dividend yields, then Broadcom (NASDAQ:AVGO) is a stock to watch. While its run over the past few years has driven the yield down, it still pays out a respectable 2.6%.
Like some of its peers, analysts expect solid growth out of Broadcom this year. Consensus revenue estimates sit at 16% growth, while earnings are forecast to climb over 26% this year.
In the second half of 2021, everyone seemed worried about Broadcom due to its exposure to Apple (NASDAQ:AAPL). Stop and think about that for a moment. The risk was that a slowdown in iPhone sales (due to supply constraints) would weigh on Broadcom. That didn’t come to fruition, as Apple navigated the supply chain storm like a true champion and Broadcom has been rewarded.
Now, we’re looking at a high-quality company with solid growth projections and strong free cash flow generation.
Qualcomm (NASDAQ:QCOM) is another leader among semiconductor stocks that works with Apple. In fact, according to U.S. News and World Report, “Qualcomm currently supplies all of the modem chips that connect Apple’s devices to mobile data networks.”
The flip side of that coin is that “Apple is working on its own modem chips.”
Is that a good thing? No. Apple is the largest company in the world, and the fact Qualcomm currently supplies the company is a big boost for its top and bottom line. In fact, as soon as 2023, Qualcomm may supply just 20% of Apple’s iPhones.
There’s always the chance that Apple continues to go to Qualcomm, but even if it doesn’t, not all hope is lost. The company is forecast to grow revenue 25.7% this year, about 8% in 2023 and 5% in 2024. Keep in mind, these estimates could still climb.
Earnings are forecast to grow 38.6% this year, 7% next year and 5% in 2024. Admittedly, that’s not robust growth in the out-years. However, it goes to show the bottom is not going to fall out for Qualcomm when it’s all said and done.
ON Semiconductor (NASDAQ:ON) is one of the lesser-known chip stocks out there, even though it sports a market capitalization of $27.8 billion. Still, it’s not the juggernaut many names on this list have become.
Yet, ON was a stock that rarely left my relative strength list this year. It’s one of the few technology plays that held up pretty well through the turmoil, even though it fell 28% from peak to trough.
Keep in mind though, Nvidia and AMD each fell about 40% from the highs to the lows. Further, ON stock didn’t even test its 200-day on the dip. That’s the quality action I like to see. Now, shares are back over all of its major moving averages and looking to press higher.
Analysts don’t expect robust growth in the out-years, but importantly, they expect revenue growth to continue accelerating. Specifically, they’re looking for 13.7% growth this year and 5.7% growth in 2023, then an increase to 9.7% growth in 2024 and another acceleration to 15.7% growth in 2025.
Earnings between $4 and $5 per share from now through 2024 keeps its valuation low and cash flows steady, too.
Intel (NASDAQ:INTC) has been one of the least impressive semiconductor stocks over the last five years. It has effectively chopped between $44 and $68 over the years, hitting the former much more than the latter.
At the same time, Qualcomm, AMD, Nvidia and others have all roared higher. So why bother with Intel at this point?
The stock is up almost 10% in the third week of March as semiconductor stocks fetch a bid. Nvidia CEO Jensen Huang said the company would be interested in using Intel as a foundry, although he did acknowledge it wouldn’t come to fruition in the short term.
Still, it seems to have inspired bulls to get long this name. Of course, a near-3% dividend yield and the fact the stock has a price-to-earnings ratio near 10x also helps matters.
Lastly, we have Applied Materials (NASDAQ:AMAT). While this company is not a semiconductor manufacturer of its own, it makes the equipment necessary for chip companies. As you can imagine, shortages and demand for semiconductors has Applied Materials in strong demand.
In the company’s own words, “We are the leader in materials engineering solutions used to produce virtually every new chip and advanced display in the world.”
Like I said at the top, with semiconductors playing a larger role in more industries by the week, the growth in these businesses is secular, not cyclical. For Applied Materials, that’s going to translate to solid revenue growth as demand remains strong. Shortages will only drive demand higher.
Analysts are calling for revenue growth of 15% and 10% this year and next, alongside 20% and 15% earnings growth in 2022 and 2023. That’s pretty impressive to me, particularly at just 16.5 times this year’s earnings.
On the date of publication, Bret Kenwell held a long position in NVDA. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.