The Best Semiconductor Stocks to Buy Now

KLA

• Market value: $53.5 billion
• Dividend yield: 1.4%

The investment thesis for KLA (KLA, $386.54) which offers semiconductor manufacturing solutions, is simple: fundamentals and industry outlook. And it's one that remains intact following the company's fiscal third-quarter earnings report.

Revenue and GAAP earnings were up 6.6% and 4.1% year-over-year, respectively. The reported revenue of $2.43 billion came in above the midpoint of KLA's guidance range of $2.20 billion-$2.50 billion.

The company sports a decent balance sheet with good liquidity, and operating cash flow exceeded $1.01 billion in the fiscal third quarter. Its free cash flow (cash from operations less capital expenditures) arrived at $925.9 million.   

Sales growth, steady EPS improvement and a decent balance sheet are probably what insulated KLAC shares from the overall downdraft in semiconductor stocks. Shares are up 21% in the past 12 months (more if you include the 1.4% dividend), versus the iShares Semiconductor ETF (SOXX), which is up just 2.8%. 

This is not an entirely logical constellation, however. Semiconductor supply companies face a big concentration as there are a limited number of customers big enough to service the foundries and related companies. So, when one or all of these customers face troubles, it can spell trouble for KLA too. Though Taiwan Semiconductor (TSM) and Advanced Micro Devices (AMD) are still growing, for example, Nvidia's (NVDA) sales were flat in the most recent quarter. This trend bears watching.    

Notwithstanding, a sure sign of management confidence – or hubris – is KLA's use of cash, the largest expenditure of which were for the company's stock buybacks and payments of dividends to shareholders, at 71% of free cash flow. All in, KLA returned a total of $659 million to shareholders in the three months ending March 31. For a company with a market cap of around $53 billion, this is a big number.  

And behind financial strength and earnings momentum is increasing demand for semiconductors worldwide in the form of a one-two punch. In addition to governments mobilizing to increase production as a means of weaning their economies from reliance on South Korean and Taiwanese chip giants Samsung and Taiwan Semiconductor, the digitization of daily life is putting chips in everything from doorbells to automotive systems. 

All of this makes KLAC one of the best semiconductor stocks going forward. 

Kulicke and Soffa Industries

• Market value: $2.7 billion
• Dividend yield: 1.6%

Kulicke and Soffa Industries (KLIC, $47.66), which provides semiconductor manufacturing equipment and services, had stellar 2021 results. These comparisons have made more recent results look not quite as good. 

In its fiscal first-quarter report ended Dec. 31, the company reported a 62% and 60% year-over-year decrease in revenue and earnings, respectively. Adding to the pain, earnings per share were down 88%. 

The stock has also lost the favor of many analysts, suffering from earnings estimate cuts. This, combined with a bearish landscape, may make for tough sledding in KLIC shares. And the sledding was tough for the stock in 2022, down more than 38% for the year-to-date in October. But it's up about 25% since then.

Kulicke and Soffa faces a concentration risk where relatively few customers can disproportionately impact earnings, and if you sell to semiconductor manufacturers and related companies, there's not that many customers to be had. In 2021 and 2022, KLIC had customers who accounted for approximately 17% of sales in each year.   

Still, the company's fiscal second-quarter guidance suggests that KLIC's "rate of deterioration is slowing," says Needham analyst Charles Shi (Hold), which "could mean bottoming."

To broaden its product portfolio and strengthen its capabilities, KLIC acquired high-precision micro dispensing equipment manufacturer, Advanced Jet Automation. The acquisition will allow Kulicke and Soffa to tap into the $2 billion dispensing equipment market and could be a long-term growth driver.   

KLIC is a solid choice among semiconductor stocks for income investors too. It is yielding about 1.6%, and the company has averaged annual dividend growth of roughly 30% since 2018, when it was instituted. 

Marvell Technology

• Market value: $33.8 billion
• Dividend yield: 0.6%

Everything seems to still be moving in the right direction at Marvell Technology (MRVL, $39.48), except for the share price which is off about 35% in the past 12 months. Off the charts, though, the company – which makes semiconductors for data storage, communications and consumer markets – is still displaying a relatively strong momentum.

Marvell reported in-line results in the fourth quarter of fiscal 2023. The company had revenue of $1.4 billion, up 6% year-over-year. For the year, MRVL reported record revenue of $5.92 billion.  

MRVL is not impervious to the headwinds facing the semi industry such as weakening demand in the consumer sector, but it was able to maintain growth in other end markets. This was particularly true in the enterprise networking and automotive/industrial, where the revenue rose 39% and 25%, respectively, year-over-year. 

When looking at Marvell, or for that matter, most tech stocks, the earnings per share is not always the best measurement for success. A look at Marvell's statement of cash flows shows that stock-based compensation, depreciation and amortization of intangible assets totaled nearly $500 million for the most recently reported quarter, a figure which dwarfs a reported net loss of $15 million. 

Also notable also is the company's commitment to research and development, spending nearly $450 million in the last quarter. Clearly, MRVL is looking to the future, though what the future looks like, beyond continued, if albeit lumpy expansion, remains difficult to discern.  

Nvidia

• Market value: $685.4 billion
• Dividend yield: 0.1%

Nvidia's (NVDA, $277.49) share price has been on a roller-coaster ride over the past 12 months. The stock was down more than 61% for the year-to-date in October 2022, after the U.S. government initiated new restrictions on chip exports to China. NVDA has found its footing since then and is starting to gain momentum. Nvidia shares are up nearly 90% so far in 2023.

For its fiscal 2023 fourth-quarter report, Nvidia barely beat analysts' revenue expectations, though its earnings per share beat estimates. Its revenue was down 21% year-over-year, and up 2% from the previous quarter.  

The company's gaming division also announced a 46% year-on-year decline in sales in its Q4 report. Its data center division remains strong, however, with revenue of $3.62 billion, up 11% from the year-ago figure – a silver lining for investors since data center represents 60% of NVDA's fourth-quarter revenue by end market. Gaming, on the other hand, represents only 30%.   

And while many chip companies have been hammered by the U.S. export controls that affected demand from Chinese companies, Nvidia found a way to circumvent this rule. The firm introduced a new graphics processing chip, the A800, that can be exported to China under the new U.S. export restrictions on AI (artificial intelligence) chipsets.

The A800 has the same processing power of its flagship A100 chip, but has a narrower interconnect bandwidth to receive data from other chips, which is critical for AI applications.  Specifically, while the A100 can send data at 600 gigabytes per second, the A800 can only transmit data at 400 gigabytes per second.  

Nvidia has solid fundamentals and arguably remains the best AI stock among semis, but it isn't out of the woods yet. Its rising inventory levels, now at $5.2 billion – double the year-ago figure due to weakening demand for its graphics processing units – can present a problem in the future. Funds tied up in unsold units could affect its earnings and cash flow. 

However, Jensen Huang, founder and CEO of NVIDIA, said that the inventory correction is "largely" behind the company, and that it will likely end in the first half of the new fiscal year. For investors who believe in chipmakers, NVDA is one of the best semiconductors stocks out there.

SiTime

• Market value: $2.4 billion
• Dividend yield: N/A

SiTime (SITM, $108.47) makes silicon-based timing products for use in electronic equipment, from mobile phones to graphics and identity cards. Timing is critical to the functioning of digital processing, and the more environments silicon-based – as opposed to quartz – timing devices can be used, the more areas advanced processing can be deployed. Timing, as they say, is everything.

The company estimates there are one to two timing chips per device today, creating a market for 40 billion units. But this will grow to 125 billion units in 2030 as silicon-based timing applications proliferate and as consumers and industries own more connected devices.

SITM demonstrated significant momentum during 2021, with revenue doubling from $36 million in the first quarter of the year to $76 million in the fourth quarter. Although revenue growth has been relatively flat this year, SiTime was able to maintain its revenue above $70 million in three of the four quarters of 2022 (Q4 revenue came in at $60.8 million).  

Annually, SiTime is holding up. For all of 2022, revenues were up 29.6% over 2021, laudable in today's semiconductor market. 

True, inventory issues remain a near-term issue for SiTime, but expectations are for demand to return in the second half of this year, says Needham analyst N. Quinn Bolton (Buy).

When assuring investors, SITM notes design wins, its leadership position, and quote activity, which are important. But better pricing and more repeat business, both of which SiTime is positioned to realize, may be what moves the needle on sales and earnings.   

SITM is a small-cap stock, and small companies can get buffeted by circumstances well beyond their control. And while this may well be the case with SiTime, for believers in semis, the timing market, and SiTime's place in it, SITM is one of the best semiconductor stocks out there.