Chip stocks probably will stage a recovery this year.
In the latter part of 2022, the semiconductor industry experienced significant declines because of a drop in demand for chip products based on technology. However, recent trends indicate the sector is regaining momentum and returning with a bang.
The technology sector heavily relies on the chip industry. These advanced engineering and manufacturing companies are critical to the global economy.
However, the industry is prone to sales volatility because of its cyclical nature, despite impressive long-term returns.
In 2021, the chip industry revenue grew by 25%, surpassing $580 billion worldwide, thanks partly to a global chip shortage that has helped support prices. The demand for microchips and electronic components is growing exponentially because of their use in various products. Hence, semiconductor producers with manufacturing sites are investing to increase production capability.
As a result, according to McKinsey, a global management consulting firm, the semiconductor industry will become a trillion-dollar industry by 2030 and experience a decade of growth. It comes as no surprise, considering the critical role chips will play in AI.
As a result, countries are battling it out for chip supremacy, and chip companies are in the crossfire.
With that kind of momentum, investors covet chip stocks.
If you’re an investor interested in chip stocks, this is the perfect moment to invest in these high-quality companies with the potential for further growth.
|TSM||Taiwan Semiconductor Manufacturing Company||$87.97|
Taiwan Semiconductor Manufacturing Company (TSM)
Taiwan Semiconductor Manufacturing Company (NYSE:TSM) is the largest microchip manufacturer. It has achieved this position by investing in increasingly advanced chip fabrication capabilities.
With fabs in two countries, Taiwan and the US, TSM can perform intricate chip designs. Its current market share of fabrication surpasses 50%, making them an industry leader.
Despite its manufacturing prowess, the company has sustained rising demand and maintained an operating profit margin of at least 30% over the past decade. In 2022, TSM reported a 32.6% YoY increase in annual revenue to $75.881 billion.
The company persists in reinvesting in production. It provides shareholders with a modest dividend, despite challenging operating conditions. Plus, any slowdown in demand is temporary.
TSMC expects strong chip demand using its 3-nanometer (nm) process in the next three years. The company’s 3nm chip supply for 2023 is fully used, with top customers like AMD (NASDAQ:AMD) and Apple (NASDAQ:AAPL)
incorporating these chips into their data centers and smartphones.
Investors are flocking to the stock this year because of these factors, leading to a 20.55% year-to-date increase in share price. This puts Taiwan Semiconductor in a rare position among chip stocks. For those looking for a dependable investment in microchip expansion, Taiwan Semiconductor is a good choice.
Broadcom (NASDAQ:AVGO) provides crucial electrical parts and components across various sectors, including 5G mobile network development, data centers, and industrial equipment.
While not the highest-growth chip business on the list, Broadcom has expanded steadily for years. Acquisitions have been key to Broadcom’s success.
Broadcom’s revenue rose by 21% in fiscal 2022 because of strong demand for chips in various markets. This growth sped up from its 15% increase in fiscal 2021.
CEO Hock Tan noted that robust infrastructure spending led to sustained demand across most of Broadcom’s end markets despite concerns about a global recession.
Thanks to this, the organization could continuously expand its primary business. Broadcom’s scale enabled it to consistently grow margins, with adjusted EBITDA rising 27% and margin expanding to 63.3%. Annual FCF also grew 22% to $16.3 billion, increasing FCF’s margin to 49.1%.
Broadcom strives to return approximately 50% of the free cash flow from the previous year back to its shareholders. This has been their policy for quite some time now.
This is done through dividends and supplements dividends with share repurchases, making it an attractive option for those seeking investment income from chip stocks.
Qualcomm (NASDAQ:QCOM), a leading chip industry player in the 2000s and 2010s, succeeded by tapping into the smartphone boom.
However, with the market becoming more mature, Qualcomm shifted its focus to remain relevant. Fortunately, 5G mobile networks has opened up a new growth avenue for the company.
Although Qualcomm is primarily known for designing smartphone microchips, it also produces network equipment components that create mobile signals. Recently, the breadth of the company’s portfolio has grown to include industrial connectivity devices.
The development of 5G networks has created additional opportunities for these businesses, further boosting Qualcomm’s revenue growth.
Despite the challenges posed by the maturing smartphone market, Qualcomm still has a firm grip on the global mobile market.
Taking advantage of its capabilities, the business is pushing forward into connected cars, smart-home tools, and industrial gear – positioning itself as a leader in these areas. In doing so, Qualcomm is building a robust business positioned to thrive in the era of 5G.
On the publication date, Faizan Farooque did not hold (directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.