13 Best Semiconductor Stocks to Buy Now
Semiconductor stocks are a rich source of growth given just how important computer chips have been, are and will continue to be to the human experience.
Semiconductors are at the heart of every computer, whether it's the one on your desk, the one in your hand or the cloud data center hundreds of miles away. And that's why semiconductor stocks have long been a source of growthy returns – and will continue to be for years to come.
Today, semiconductors are showing up everywhere, from your car to your wristwatch to your toaster. Connecting these chips, and thus using yet more chips, will be homes, factories, warehouses and even whole cities, via self-adjusting networks.
That has only heightened the importance of specialized semiconductor companies, whose products command everything from a device's ability to power up to its ability to communicate with other devices. Some semiconductor stocks specialize in memory, others in graphics, still others in storage. Some merely design chips, while others manufacture them and still others create the machinery that's needed to churn out semiconductors.
These advances have come amid Moore's law, which observes that the number of transistors in a microchip will double roughly every two years – a trend that, for a long time, also meant chips were consistently getting cheaper. But they've also come amid Moore's second law, which observes that chip fabrication plant costs double every four years – illustrating an increasingly competitive and pricey environment. And then there's what I call "Moore's Third Law": The process of change is constantly accelerating, forcing companies to make faster, engineering-based decisions that are pressuring management to become increasingly entrepreneurial.
Moore's Third Law means no lead in this space is safe, as Intel (INTC) – which we'll explain as we go along – has discovered. Which means you need to pick stocks with a clear edge and the resources to maintain it.
Here, we outline 13 of the best semiconductor stocks to buy now. These companies cover a broad swath of the chip universe, from designers and makers to equipment and materials firms.
Data is as of Oct. 4.
Advanced Micro Devices
- Market value: $96.0 billion
- Specialty: Microprocessors and graphics
Advanced Micro Devices (AMD, $81.80) is the new boss of the microprocessor world. But it's not the same as the old boss.
While Intel both designs and manufactures chips, AMD only designs them. The company sold its chip-making factories, called fabrication plants or fabs, in 2009 to what's now called Global Foundries.
Credit for AMD's rise goes to Dr. Lisa Su, a native of Taiwan who became CEO in 2014. By then, she had 20 years' experience as a management engineer with International Business Machines (IBM), Texas Instruments (TXN) and Freescale Semiconductor. For her Ph.D at MIT, she studied "silicon on insulator," a semiconductor structure that helps improve performance.
Dr. Su has focused on microprocessors and gaming chips, two areas of high growth that have put AMD among some of the best semiconductor stocks of the past five years at roughly 4,400% returns. She also has benefited from stumbles at Intel, which was unable to manufacture its latest designs – a job that AMD handed off to Taiwan Semiconductor (TSM).
Wedbush Securities analyst Matt Bryson writes that "demand appears to be holding, stronger than anticipated" and "AMD is just beginning to ramp into new gaming consoles." Indeed, Advanced Micro Devices still has only about 20% of the PC microprocessor chip market and 10% in servers. Bryson rates the stock at Outperform, which is the equivalent of Buy.
Ross Seymore of Deutsche Bank's Ross Seymore has a Hold rating on AMD, it's largely because of valuation issues. Otherwise, he likes what he sees. "Overall, AMD continues to execute superbly in the near-term and deliver a consistent and predictable roadmap of ever-improving products that should be even more attractive to customers' mid/ long-term plans following INTC's latest manufacturing misstep."
- Market value: $144.3 billion
- Specialty: Communications
Broadcom (AVGO, $356.83) saw its history as a vendor of networking chips upended in 2016, when Malaysian billionaire Tan Hock Eng, known as Hock Tan, acquired it through a company called Avago. AVGO was retained as the stock symbol, but the company took the Broadcom name.
Tan is more of a dealmaker than an engineer. Soon upon buying Broadcom, he set his sights on Qualcomm (QCOM). He even moved his headquarters to the U.S. as part of his pursuit of approval from the Trump administration. He ultimately failed when the Treasury Department refused its approval, citing national security concerns.
The combined Broadcom is doing just fine nowadays, of course. The semiconductor stock's chips go into a wide variety of wireless and wired networking devices. And the company also offers security, enterprise, and even mainframe software. Those businesses brought in $22 billion in revenues during fiscal 2019, which ended in November; it was slightly ahead of that pace as of the third quarter of its fiscal 2020.
Deutsche Bank analyst Ross Seymore (Buy) recently updated his model for Broadcom revenues. He favors the company's diversity, as it sells both to slow-growing networking companies such as AT&T (T) and to faster-growing cloud companies. This "insulates" the cloud segment from industry volatility, Seymore writes.
JPMorgan Chase's Harland Sur (Overweight, equivalent of Buy) wrote that "strong datacenter spending implies strong server spending combined with increasingly complex compute workloads – Good for OW-rated INTC, NVDA, and AVGO" back in July.
Daniel Milan, managing partner of Cornerstone Financial Services in Southfield, Michigan, says Broadcom's strength in chips used in datacenters and phones offsets any weakness in industrial markets. The company's 2018 buyout of CA and 2019 purchase of Symantec's (SYMC) enterprise software unit brought stable, recurring revenue from mainframes and corporate networks, he adds.
Another reason to view Broadcom among the market's best semiconductor stocks is its dividend, which currently yields 3.6%. That's roughly twice the broader market's rate and much better than 10-year Treasuries, which yield below 1%.
- Market value: $29.8 billion
- Specialty: Manufacturing Equipment
KLA (KLAC, $191.96) doesn't make semiconductors. In fact, it doesn't so much make the machines that make the semiconductors – instead, it produces equipment and software that makes those machines yield better results.
Consider masks, which are like a recording master – something through which semiconductors are copied. Well, one thing KLA produces is equipment and software to inspect masks before they go into production, and while they're being used. This reduces production defects, increasing manufacturing yield. It's a $500 million market currently and expected to grow at more than 8% annually through 2024.
KLA produces dozens of machines used in various aspects of chip manufacturing. While only a few companies produce microprocessor chips, there are dozens of different types of semiconductors, thus many different companies for KLA to sell to.
For its most recent fiscal year, which ends in June, KLA notched 27% year-over-year revenue growth to $5.8 billion, and net income improved by 3% to $7.70 per share. But it's not very expensive, at less than 16 times forward-looking earnings.
Analysts covering chip stocks are broadly leaning bullish, with nine Buy calls and 11 Holds on KLAC versus no Holds. Stifel analysts, for instance, have recently upgraded the stock to Buy.
"We believe the recent weakness in the group (that can be attributed to several factors including concerns on worsening China trade tensions and potential memory capex cuts) has brought shares to more attractive valuations, which support our more favorable rating," they write. "Fundamentally, while we still have concerns on nearterm memory capex plans, we are incrementally more positive on 2021 wafer fab equipment (WFE) spending and believe it will be up from 2020 levels."
- Market value: $47.7 billion
- Specialty: Manufacturing equipment
Lam Research (LRCX, $328.71) is the leading producer of equipment used to make semiconductors, and if shares are any indication, business has been booming for years. The company has averaged 39% annual stock-price appreciation over the past five years, and LRCX shares have managed a 12% gain here in 2020 – both figures better than an index of semiconductor equipment and materials stocks.
Lam's most recent quarterly results, released in late July, showed a 12% YoY improvement in revenues to $2.8 billion, while earnings of $4.74 per share were up 22%. Both figures topped analyst estimates, but investors still took profits after the report.
LRCX, like KLA, is trading at a decent valuation of less than 16 times analysts' forward earnings estimates. It also yields a humble 1.6%.
UBS's Timothy Arcuri (Buy, $380 price target) notes that Lam is strong in the market for memory chip equipment, but it's gaining share outside that niche. He's also in a crowded Buy camp: Twenty-one analysts say the semiconductor stock is a Buy, versus just four Holds and no Sells, according to S&P Capital IQ data.
- Market value: $51.7 billion
- Specialty: Memory chips
Micron Technology (MU, $46.55) is the leading U.S. producer of memory chips.
Memory chips have been undergoing a "super cycle" within the computer world. They have replaced spinning disks in phones and PCs. As their price continues to decline, and as cloud computing networks demand faster access to memory, datacenters are buying more chips, too.
Micron, unlike many of the other names on this list, is actually down substantially (13%) for the year. Blame COVID-19, which has cut both supply chains and demand. Analysts have begun asking if the super cycle is over. Memory chips are a commodity, after all, making stock in memory companies volatile. MU shares fell hard in both 2015 and 2018, when gluts hurt prices and profits. The company has thus learned to maintain a high cash balance, which currently sits at $8.1 billion.
Fortunately, this isn't the first rodeo for CEO Sanjay Mehrotra, hired in 2017. Mehrotra built SanDisk before selling it to Western Digital (WDC) in 2016, and Micron grabbed him as its CEO. The chief took Micron past the bottom of its product cycle and offers a sense of stability.
Some analysts are adopting a cautious stance. Deutsche Bank's Sidney Ho recently downgraded Micron to Hold. "We did extensive checks with the supply chain (in August) and came away more negative over the next several quarters," he writes. "While we continue to like the secular story of MU and the memory industry, we tactically step to the sidelines until we get more clarity."
Credit Suisse, however, isn't just maintaining an Outperform rating – it calls Micron "the best Risk/Reward in Semis." Micron's recent revenues were above analyst estimates, they write, with only minor impacts from the virus. They expect growth of 15%-30% in the company's memory markets and remain optimistic on sustained datacenter demand.
- Market value: $322.7 billion
- Specialty: Graphics
Nvidia (NVDA, $522.49), long one of the best semiconductor stocks on Wall Street, has become the new leader of the U.S. semiconductor industry. It is now worth over $100 billion more than Intel, thanks not just to its own growth but Intel's stumbles.
Nvidia is "fab-less." It designs chips, but it doesn't manufacture them. As hardware becomes software, capital requirements for companies like Nvidia are a fraction of what they are for manufacturers like Intel. That means profits can be thicker.
Nvidia has been growing like a weed. The company's revenues for its fiscal 2020 ended Jan. 26 were more than double fiscal 2016's. Net income is up 355% in that time.
While Nvidia's original niche was in computer gaming, the company's second quarter marked the first time datacenter revenues surpassed gaming. That's because its graphics chips also are ideal for delivering artificial intelligence (AI) applications like those from voice interfaces such as Amazon's Alexa, Apple's Siri and Alphabet's Google Assistant. It expanded by purchasing Mellanox, which creates networking fabric for cloud datacenters, in a deal that closed this year. It's also acquiring Arm Holdings, the microprocessor design house which Japan's SoftBank (SFTBY) paid $31 billion for in 2016, for $40 billion.
Cornerstone's Milan says analysts are looking closely at whether Nvidia holds the $500-per-share level. "Video game sales are booming during the coronavirus pandemic," he writes.
"We see minimal near-term fundamental risks for NVDA in light of current strength in gaming and AI," writes Wedbush's Matt Bryson. "Also, we continue to like NVDA's strong positioning in both these categories which we believe have attractive long term growth trajectories." Wedbush rates the stock at Outperform and recently lifted its price target to $600 per share, but it did take the stock off its "best ideas list" for a familiar boogeyman: a high valuation. NVDA shares currently trade at 61 times future earnings estimates.
That won't put off many growth investors, but value investors might balk at such high levels.
- Market value: $35.6 billion
- Specialty: Communications and microcontrollers
Netherlands-based NXP Semiconductors (NXPI, $127.39), which makes communication chips and microcontrollers, has become Europe's largest chipmaker.
The company, launched as a spinoff of Philips (PHG) in 2006, would later buy Freescale Semiconductor, then part of Motorola, in 2015. Qualcomm sought to buy it in 2016, but Chinese authorities refused to approve the deal and it was canceled in 2018.
While most NXP chips go into phones and base stations, hedge funds buy the stock for the company's work in cars, factory automation and the Machine Internet. But the company has struggled with the pandemic. June-quarter revenues were off 18% from a year earlier, and the company logged a $214 million loss. Shares are at breakeven for the year. On the upside, valuation is reasonable at less than 17 times earnings estimates.
Recent bullishness is all about cars. Cars continue to rely more on chips, and NXP can increase its share there. Contactless payments and proximity sensing are other areas of strength. The faster the car markets and 5G services can get out of the starting blocks, the faster NXP will grow.
Despite the June-quarter loss, Stifel analysts Tore Svanberg and Jeremy Kwan (Hold) note that NXPI still beat estimates. Moreover, NXP has still managed to generate $340 million in free cash flow. Stifel expects better things in the September quarter: namely, a 10% increase in revenues to $2 billion.
But largely, Wall Street is bullish on this semiconductor stock. Twenty analysts say NXPI is a Buy, versus just eight Holds, according to S&P Capital IQ data. That includes Wells Fargo's Gary Mobley, which calls the stock a "top post-pandemic idea."
- Market value: $130.3 billion
- Specialty: Communications
Qualcomm (QCOM, $115.47), best known for selling the Snapdragon line of mobile CPUs, has used its intellectual property to become the dominant supplier of mobile communications chips. Even in the midst of a pandemic, analysts believe it's on pace to sell more than $21 billion worth of product for the current fiscal year.
Qualcomm also finds itself in court quite a bit. One of the biggest cases has gone in its favor, however. In 2019, QCOM lost a case over its policy of tying licenses of patents and trademarks to chip purchases, but an appeals court overturned that in August 2020. Deutsche Bank analyst Ross Seymore (Buy) says the decision removed the final legal overhang over Qualcomm's dominance of its markets.
How fast Qualcomm grows depends on how quickly 5G communications becomes a standard feature in networks and a "must have" in phones, according to Cornerstone's Daniel Milan.
"For investors looking to cash in on the 5G movement, Qualcomm is a top stock to start with," he writes. "Qualcomm currently seems like a reasonable value and one of the better ways to invest in 5G, which we believe is a strong thematic investment strategy over the next 5+ years."
One concern to consider, however, is Apple (AAPL). While the iPhone maker is a current Qualcomm customer, it is moving toward using its own 5G antenna as part of a larger move toward making its own processors. That would remove some of Qualcomm's sales volume.
Despite knowing that, the analyst community is firmly in the Buy camp, with 20 Buys versus six Holds and just two Sells, according to S&P Capital IQ data.
- Market value: $24.5 billion
- Specialty: Communications
Skyworks Solutions (SWKS, $146.83) is very well known for its reliance on Apple, its biggest customer.
Skyworks, which makes wireless communication chips, deals in power amplifiers, power management, receivers and other products that control subsystems you might not notice but that are essential for making digital communications work. And in fiscal 2019, a little more than half of its revenues came from the iPhone maker.
Despite that reliance, analysts are fairly bullish on SWKS, with 18 Buys versus nine Holds and one Sell.
Analysts like UBS's Timothy Arcuri (Neutral) expect this latest phone replacement cycle to be strong. He calls Skyworks' most recent quarterly earnings "solid," adding it did "nothing to sway the narrative in a negative direction."
Skyworks' 5G prices are falling, but this just means a bigger market, with 60% of the phones sold in China this June supporting 5G. Needless to say, Arcuri is bullish on the iPhone replacement cycle.
Daniel Milan of Cornerstone Financial calls Skyworks a "strong 5G thematic play." A 5G phone delivers more value than older technology, so "Skyworks is increasing its revenue share of each new smartphone."
That said, more than anything, Skyworks needs to diversify its revenue beyond Apple. For now, it acts as almost an "Apple proxy," meaning as the iPhone maker's fortunes go, so do Skyworks'. If you're willing to have that much more exposure to Apple, SWKS is an interesting play … but if not, consider more diversified semiconductor stocks.
- Market value: $419.0 billion
- Specialty: Microprocessor manufacturing
Taiwan Semiconductor (TSM, $80.80) is a global semiconductor foundry, and an advanced one at that. It's the first chip manufacturer to have mastered the arcane Extreme Ultraviolet (EUV) fabrication process. It also has made more than 1 billion chips with circuits just 7 nm apart – the same chips Intel has famously struggled with.
TSMC is vital because of its location. China considers Taiwan a breakaway province and has been working hard to make its own chip industry independent of it. It has hired away top engineers, spent billions of dollars, and even used hackers to seek out the company's secrets, as well as those of its customers. But Chinese chip-making remains multiple generations behind TSMC's, still working to master 14 nm circuits.
Taiwan Semiconductor is hedging its bets, negotiating to build a new plant in Arizona. The problem is that chairman Mark Liu is demanding costs comparable to those in his home market. The company is thus on a knife edge, along with the rest of the world, caught between the decade's ambitions of China and the U.S.
Calhoun, of the Stevens Institute of Technology writes that tensions around TSMC are already rising as the Trump administration moves against China's Huawei.
"The latest U.S. government measures enjoin any company, anywhere, from using American technology to supply Huawei," he writes. "That catches TSMC in the anti-Huawei net, because TSMC uses semiconductor-manufacturing equipment that does come from U.S. companies."
Wall Street is hardly discounting these issues. TSM trades at nearly 25 earnings estimates amid a 39% rally in shares so far in 2020.
"We sense that a strong Apple product lineup should revive the positive sentiment on supply chain. In the food chain, we believe the beneficiaries are Hon Hai and Luxshare for assembly parts. And as for components, we are positive on TSMC, USI and Speed Tech as the three companies have a presence across most product lines," writes JPMorgan analyst William Yang (Overweight).
Cornerstone's Milan also likes the tighter relationship with Apple, as well as opportunities in gaming-console growth. "Expect those tailwinds to boost TSM's revenue and earnings 28% and 34%, respectively, this year – robust growth rates for a stock that trades at 25 times forward earnings," he writes.
- Market value: $129.2 billion
- Specialty: Digital signal processing
The patents for microprocessors were shared between Intel and Texas Instruments (TXN, $141.09). Texas Instruments engineer Jack Kilby won the sole Nobel for the invention in 2000 because Intel co-founder Robert Noyce had died.
But Texas Instruments walked away from this part of the business in the 1980s. Instead it chose to focus on what it calls digital signal processing, turning analog signals like sound and pictures into digital signals and vice versa. The first DSPs appeared in the 1970s, on a toy called the Speak & Spell.
TI now makes a wide range of chips including amplifiers, wireless connectivity chips, sensors and power management products. It also makes steady profits, which it shares with shareholders. Over the past five years, TXN's quarterly dividend has shot from 34 cents per share to 90. That's why, despite a nice 10% gain year-to-date, shares still yield a healthy 2.8%.
The company also has growth catalysts, says UBS's Timothy Arcuri.
"With the company effectively calling a bottom in autos, we think the stage is set for a multi-quarter recovery (following eight quarters of declining revenue)," he writes. Most of Texas Instruments' sales now go directly to manufacturers, instead of to re-sellers, which means the company can see a broad-based sharper snapback than in prior cycles.
That's an important point about the chip business. It's highly cyclical. Sales and profits rise and fall regularly. A semiconductor company needs cash to ride these waves, and Texas Instruments had nearly $5 billion at the end of June.
This is not TI's first rodeo.
- Market value: $25.1 billion
- Specialty: Programmable chips
Xilinx's (XLNX, $102.59) numerous inventions include what's called the field programmable gate array (FPGA), which can be loaded with software by a manufacturer, eliminating the need for memory chips or storage.
Xilinx Kintex FGPAs go into a wide variety of products, adding intelligence to devices that can be controlled through measurement. That sets it up nicely for the age of the Internet of Things, where cars, homes, factories, warehouses and even cities manage themselves automatically. Xilinx' communications expertise also gives it a play in mobile infrastructure through OpenRAN, which hopes to bring standards to the 5G ecosystem.
William Blair analyst Alessandra Vecchi (Market Perform) expects Xilinx' core industrial markets to recover later in 2020 and into 2021. Sales to the auto industry fell during the first half but should pick back up. Overall, Vecchi sees an improving outlook.
Credit Suisse analysts, who are more upbeat at Outperform, saw June-quarter results that beat the company's own guidance by $35 million and write that Xilinx is "getting back the growth mojo." Their target price has increased to $120, about 17% ahead of current prices.
And back when Nvidia's interest in Arm Holdings was merely rumored, Cascend analyst Eric Ross said the company had room to buy both Arm and Xilinx. The latter would make sense because it would help Nvidia diversify into defense and aerospace customers.
- Market value: $216.9 billion
- Specialty: Microprocessors and manufacturing
Intel (INTC, $51.01) has quickly gone from the biggest and one of the best semiconductor stocks on Wall Street to something of an underdog.
There are two reasons for that. First, Intel's microprocessor designs have arguably been passed by those of AMD, and its graphics chips by Nvidia. Second, it continues to have trouble making the next generation of chips: those with circuit lines 7 nm apart. The company's shares tanked this summer after announcing its 7 nm chips would be delayed by six months and wouldn't debut until 2022 or 2023.
George Calhoun, a former communications executive who now works at the Stevens Institute of Technology in Hoboken, New Jersey, calls Intel "America's national champion" in semiconductors. He says it is burdened by Moore's Second Law, which as we mentioned before, says the capital costs of chip manufacturing are constantly expanding. New foundries can cost $20 billion, and Taiwan Semiconductor's lead in this area is now considerable.
Still, consider Intel something of a sleeping dragon.
No U.S. chipmaker brought in more revenues than Intel's $72 billion in 2019, and that should reach nearly $75 billion this year. It logged a $21 billion profit last year. It has nearly $26 billion in cash and cash equivalents currently. All that is to say that Intel certainly has the resources to make a transformational acquisition if it identifies one.
The key to Intel's success today lies with cloud datacenters, which are built for commodity chips, not fast ones. Intel's ability to mass-produce standard processors for these customers gives it an enormous revenue base.
But UBS also sees hope in the company's recent Tiger Lake mobile CPU launch. "Although the stock has underperformed SOX by 40% as investors focus on 7nm slippage, with Mobile accounting for ~20% of INTC revenue, we think a successful Tiger Lake launch serves as a blue-print for execution that can be replicated across multiple product families, enabling a gradual de-coupling between products and process – a first step in nullifying AMD's manufacturing advantage," writes Timothy Arcuri, who rates INTC at Buy.
Any number of other potential catalysts could send Intel stock soaring. A management change, or perhaps a breakup separating manufacturing from design. Even just a shift into value – INTC trades at roughly 10 times forward earnings and yields 2.6% – could give this semiconductor stock a boost.