Semiconductors are increasingly crucial as our economies become more digitized and everything gets connected. These trends bode well for top semiconductor stocks as the number of chips on devices and machines increases.

The iPhone moment of AI has arrived, meaning more chips to train AI models. Every company is considering AI regarding productivity and how it will disrupt their industries. As a result, demand for high-end chips with lots of processing power is growing.

But semiconductor usage is also growing in traditional industries. For instance, the semiconductor content in vehicles is rising. EVs require numerous chips for power electronics, battery management systems, motor control, and charging infrastructure. Moreover, modern infotainment, communication, and user interface features on modern vehicles need more semiconductors.

With increased applications, semiconductor demand will continue to grow. However, the semiconductor industry is very competitive, with multiple competitors in each segment. Therefore, it’s crucial to pick the winners.

Leading semiconductor stocks with high returns will outperform peers. The following companies dominate their categories and will capture most of the value.

Nvidia (NVDA)

One of the top semiconductor stocks to participate in the AI theme is Nvidia (NASDAQ:NVDA). Its chips have the lowest total cost of ownership (TCO) and are currently the best in training AI models. These advantages are flowing directly to the company’s financials.

On May 24, the stock reported outstanding first-quarter fiscal 2024 results. Total revenues declined 13% year-over-year, but on a sequential basis, they grew 19% from Q4 FY2023.

The biggest surprise for the markets was their guidance for the second quarter. Management issued second-quarter revenue guidance of $11.00 billion, which was $4 billion above consensus.

Management highlighted that we are in the early innings of accelerated computing and generative AI. “A trillion dollars of installed global data center infrastructure will transition from general-purpose to accelerated computing as companies race to apply generative AI into every product, service, and business process,” said Jensen Huang, founder and CEO of Nvidia.

Demand for Nvidia’s products is surging as companies enter the AI race. The firm has had to increase supply to meet the increasing demand. This demand bodes well for Nvidia’s revenue going forward.

So far, its H100 chip is the best in training AI models in the market. Notably, it enjoys a monopoly with very little competition. Although Advanced Micro Devices (NASDAQ:AMD) recently launched a potential competitor, Nvidia has a greater than two-year head start. The MI300X is unlikely to challenge the H100’s dominance any time soon.

Texas Instruments (TXN)

Texas Instruments (NASDAQ:TXN) produces analog chips for various applications. While its chips might not garner the buzz like AI chips, they are crucial in everyday applications. Its chips include data converters, embedded processors, amplifiers, radio frequency (“RF”) technologies and power management products.

The company focuses on high-quality analog chips that enable it to earn higher margins. Since these chips aren’t subject to Moore’s law, they have long product cycles and limited obsolescence risk.

Due to its prudent capital stewardship, Texas Instruments is a top semiconductor stock. Management aligns with shareholders focusing on maximizing free cash flow power share. Since 2004 it has grown the metric at an 11% annual rate.

Currently, the analog chip market is in a downturn, but no company is suited to handle the downturn better than Texas Instruments. While smaller players might struggle, it has a robust balance sheet to navigate the cycle. Furthermore, since its chips have long cycles, the company can build up inventory levels and then fulfill customer orders when the eventual recovery happens.

Taking a longer-term view, the demand for analog chips is growing. McKinsey expects the total automotive sensor market to reach $468 billion by 2030, representing a 5.6% CAGR. Texas Instruments generates 25% of revenues from automotive and is investing to meet this demand. It’s building new fabs to produce analog and embedded processing chips.

For now, TXN stock is one of the top semiconductor stocks to play the digitization and electrification trend. The stock trades at a forward P/E of 24. Additionally, the company pays an attractive 2.6% dividend. With an impressive dividend growth record for 17 consecutive years, expect them to continue flowing.

ASML Holding N.V. (ASML)

After the recent earnings-related sell-off, ASML Holding N.V. (NASDAQ:ASML) is one of the top semiconductor stocks to buy on dips. This semiconductor equipment supplier manufactures deep ultraviolet (DUV) and extreme ultraviolet (EUV) machines used in chip production.

Today, ASML has a monopoly on EUV lithography machines. This advanced equipment is crucial in making chips, and one machine can cost as much as $200 million. Taiwan Semiconductor Manufacturing (NYSE:TSM), Samsung, and Intel (NYSE: INTC) are its largest three customers.

Due to its monopoly, ASML enjoys tremendous profitability and is among semiconductor stocks with high returns. Over the past few years, gross margins have improved from 46% in FY2018 to over 50% in the last two years. At the same time, free cash flow per share has grown from $6.64 to $19.30 in FY2022.

Recently, ASML stock sold off after its earnings and disappointing TSMC results. The decline in TSMC’s revenues highlighted the likelihood of a prolonged downturn in the semiconductor equipment market. However, looking closely at ASML’s second quarter 2023 results paint a different picture.

For the quarter, revenues grew sequentially from €6.7 billion to €6.9 billion. In terms of YOY performance, revenue growth was 27.8%. Management also issued an optimistic outlook. “ASML expects strong growth for 2023 with a net sales increase towards 30% and a slight improvement in gross margin, relative to 2022,” said ASML President and CEO Peter Wennink.

Given the company’s dominant position, revenues will increase as accelerated computing and artificial intelligence grow. Buy ASML stock now for growth and returns.

On the date of publication, Charles Munyi did not hold (either 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.