The semiconductor industry is already massive, but it could grow by 80% this decade to exceed $1 trillion, according to an analysis from McKinsey.
There are several trends driving the demand for semiconductors higher. There's an ever-increasing demand for computing power and data storage, recently fueled by the surge in the use of and interest in generative AI. Smartphones and wireless communication devices continue to grow. And more advanced automobiles require more (and more powerful) chips to power advanced road safety and self-driving features.
Investors looking to take advantage of the continued growth in the semiconductor industry should consider these three stocks. All three trade at attractive values and offer the potential to outpace the overall industry for the next decade.
1. TSMC: The company other chip companies can't live without
Most companies that design chips don't do their own manufacturing. They outsource production to another company called a foundry or a "fab."
The biggest fab in the world by far is Taiwan Semiconductor Manufacturing(NYSE: TSM), also known as TSMC. The reason TSMC is the go-to foundry for chip designers is because of its leading technological capabilities. It's one of just two foundries in the world capable of producing the most recent cutting-edge chips (which use a 3-nanometer process node) at scale.
A smaller process node allows designers to fit more transistors into a given area of silicon. That allows each chip to perform computations faster while consuming less power.
That advantage was extremely important in the early days of smartphones and battery-operated computing devices, but today, it's of growing importance for data centers, where rising demand has led to some very big power bills. As such, many data center operators have been shifting away from using x86 architecture chips toward more energy-efficient designs. TSMC will be the big beneficiary of this switch over time.
TSMC's big advantage stems from its scale. As the largest third-party fab in the world, focused solely on improving its ability to make cutting-edge chips, it's able to invest more in R&D and maintain its technological lead. That gives it a strong likelihood of maintaining or even growing its position as the fab that chip companies prefer to go to with their newest designs. That should enable TSMC's growth to outpace that of the rest of the industry.
Trading at roughly 16 times forward earnings, the shares are priced well below their historic valuation of more than 21 times earnings. After the cyclical setback in the industry over the past year or so, TSMC looks well-positioned for growth in 2024 and beyond.
2. Qualcomm: The 5G era is just getting started
We've just entered the 5G era, and one chipmaker is capitalizing on nearly every wireless device sold.
Qualcomm(NASDAQ: QCOM) holds an extremely valuable portfolio of patents related to wireless technologies and chip designs for networks ranging from 3G to 5G, and everything in between. Each time a device maker uses one of its patents, Qualcomm collects a nice royalty check.
Qualcomm is also a chip designer -- its baseband chips and applications processors show up in many higher-end Android phones and other devices.
Apple currently uses Qualcomm's baseband chips, but it's developing its own 5G chips in-house. However, the iPhone maker won't shift to using them until at least 2026. When that transition does happen, though, Qualcomm will lose a significant slice of its revenue. Apple accounted for more than 10% of Qualcomm's revenue in its fiscal 2023 (which ended Sept. 24).
Still, the outlook for Qualcomm remains strong after a slowdown in smartphone sales over the last two years. Smartphone sales in China are recovering, and Qualcomm is facilitating trends like on-device generative AI and the Internet of Things. It's even designing its own power-efficient data center chips. So, while it might lose a big customer in the near future, it should be able to produce revenue growth that bests the industry average over the long run.
Trading at around 14 times forward earnings, the stock is slightly below its historic average valuation. And despite some headwinds justifying a slightly lower price, the shares still seem attractive among semiconductor stocks.
3. NXP: Cars are getting smarter, and this company is a big reason why
One of the fastest-growing segments of the semiconductor industry is the automotive sector, according to McKinsey's analysis. As cars add more and more features, they require more and more chips. And NXP Semiconductors(NASDAQ: NXPI) supplies those chips.
While most other chipmakers were reeling due to a market downturn last quarter, NXP saw its automotive chip sales increase 5% year over year. That said, it wasn't completely shielded from the headwinds, as it also has exposure to smartphones and other industrial applications, which saw a decline. However, the automotive segment helped it finish the quarter with flat revenue year over year.
The automotive industry accounts for more than half of NXP's business, and that part of its business should continue growing as it wins more content per car. The rise of electric vehicles will act as a tailwind for the company.
Meanwhile, its exposure to the Internet of Things and its dominance in the niche of near-field communication chips (which make contactless payments systems possible, among other things) provide a solid base of revenue and high profit margins.
You can currently buy its shares for less than 13 times forward earnings. That's a great price for a company that's already showing it can recover faster from a cyclical setback in its industry than most of its peers.
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Adam Levy has positions in Apple, Qualcomm, and Taiwan Semiconductor Manufacturing. The Motley Fool has positions in and recommends Apple, Qualcomm, and Taiwan Semiconductor Manufacturing. The Motley Fool recommends NXP Semiconductors. The Motley Fool has a disclosure policy.