The semiconductor industry turned south after rising sharply in the first half of the year. The S&P 400 Semiconductor index is down 11% in 2023 but off by nearly a third from its highs early on. Investors were expecting another down year on top of the drubbing chip stocks took in 2022, but a turnaround is forming. This led us to creating this list of semiconductor stocks to buy.
Consumer spending remains strong despite rising inflation and falling personal computer shipments. Companies like Apple (NASDAQ:AAPL) supplier Foxconn (OTCMKTS:FXCOF) saw profits rise 11% from last year beating analyst expectations. Smartphone sell-through volumes rose 2% sequentially even if they were down 8% year over year. Canalys says the global smartphone slowdown is almost over. The market only dropped 1% in the third quarter.
Yet the situation remains volatile. Amazon (NASDAQ:AMZN) announced it is cutting 180 jobs in its gaming division and video game engine maker Unity Software (NYSE:U) said layoffs are in the works. But artificial intelligence (AI) still drives growth higher. All eyes are on Nvidia‘s (NASDAQ:NVDA) third-quarter earnings report next week.
So sifting through semiconductor stocks to buy becomes a more intensive process. Right now, though, is an opportune time because of their discounted valuations. What follows are three of the best supercharged chip stocks waiting to be bought.
Taiwan Semiconductor Manufacturing (TSM)
Foundry giant Taiwan Semiconductor Manufacturing (NYSE:TSM) gave the market an early preview of the turnaround brewing in the industry. It singlehandedly lifted the chip market when it reported blowout October sales numbers. Revenue for the month rocketed 35% higher from the previous quarter!
Nvidia’s demand for AI chips undoubtedly helped push sales higher (TSM is Nvidia’s chip supplier), but AI only represents 6% of total revenue. However, TSM anticipates customers will continuously add on more AI features to their chip orders as time progresses so expect that figure to grow.
Indications of a smartphone rebound were also present. Segment revenue jumped 33% higher and accounts for 39% of revenue. High-performance computing was also up 6% while Internet of Things rose 24%. Although automotive and data centers were the two segments that declined, they represent just 5% and 2%, respectively, of total revenue.
Although Taiwan Semiconductor Manufacturing stock is up 29% this year, it’s still offered at an attractive 16 times next year’s earnings. If the cyclical semi industry is ready to roar, you’ll want to climb aboard the TSM train now.
ASML Holding (ASML)
ASML Holding (NASDAQ:ASML) is vital to semiconductor industry even though it’s not a chipmaker itself. It is an equipment supplier to the manufacturers. It sells critical tools such as extreme ultraviolet lithography (EUV) photolithography machines, immersion systems, and other types of lithography equipment.
ASML is the world’s only manufacturer of EUV machines, a valuable monopoly when chipmakers want to produce ever more advanced chips. Among its customers are TSM, Intel (NASDAQ:INTC), and Samsung, the three of whom account for an estimated 80% of revenue.
Because Taiwan is a potential flashpoint on the geopolitical stage, there is some risk to its business (and to TSM’s, naturally). Customer concentration can’t be lightly dismissed either. Yet there are long-term industry tailwinds that should keep driving ASML forward. Investors also have good visibility into ASML’s revenue.
Wall Street is upbeat and expects the equipment supplier to grow earnings at a compounded rate of 22% annually. With a dividend that yields a modest 1% annually, investors will want to stock up on ASML shares now.
NXP Semiconductors (NXPI)
NXP Semiconductors (NASDAQ:NXPI) is arguably one of the better values among its peers today. The near-field communication chipmaker trades at just 12 times earnings estimates and 18x the free cash flow (FCF) it generates. Its growth potential lies in the proliferation of smart electric cars. NXP’s chips allow cars to communicate with one another and the environment around them. The automotive segment accounts for 57% of revenue.
It’s also the source of the biggest risk. High interest rates are dampening EV demand. Although sales are still growing, the rate of growth is slowing. Ford (NYSE:F) is cutting one shift at the plant making its Lightning F-150 pickup truck. China’s Contemporary Amperex Technology, also known as CATL, the world’s largest EV battery maker, recently reported revenue grew 11%, its weakest quarter in two years.
Even so, EV sales in the third quarter topped 300,000 vehicles in the U.S. for the first time. They were up 14% in the European Union in September and 22% higher in China.
Fortunately, it’s not just EVs where NXP’s chips are used. The semiconductor stock provides chips for various advanced driver assistance systems, in-vehicle networking, body, chassis, powertrain, and safety applications. As the auto market returns, NXP Semiconductors will be a chip stock you should own. If you are looking for semiconductor stocks to buy, start here.
On the date of publication, Rich Duprey 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.
