What a difference a quarter can make. At the end of last year, when the market was in bad shape, semiconductor stocks were some of the worst performing equities in the entire market. The iShares PHLX Semiconductor ETF (NASDAQ:SOXX) plunged as a variety of economic issues took hold. But year-to-date is another story. The SOXX and chip stocks are on a roll.
Why the sudden change?
First off, the Federal Reserve has taken its foot off the brake and paused on raising interest rates. That’s left the flow of easy money going. With that, investors have flooded growth stocks once again — with technology equities getting a huge piece of that pie. Semiconductor stocks couldn’t help but rally.
At the same time, the global economic backdrop has been better. With the predicted end of the U.S.-China trade war, demand for the chips is expected to skyrocket over the next few years as growth returns. With prices depressed at the end of last year, the semis were a huge value compared to many other sectors. Add in a ton of recent M&A deals and you have a recipe for success.
The best part is that there is still time for the SOXX and semiconductor stocks to keep the mojo going.
For investors, despite its recent hotness, the semiconductor stocks could be a great buy going forward. But which ones? Here are five of the best chip makers around.
I’ll admit it, NVIDIA (NASDAQ:NVDA) seems like the easy lay-up when it comes to the semiconductor stocks. But that’s only because NVDA continues to find more ways to win. While graphics-processing units (GPUs) have long been the staple in video game and gaming PCs, the chip stock has been finding plenty of new ways to use its technology. That includes a hefty amount of self-driving automobiles, A.I. and even bitcoin mining.
Even better is that GPUs are quickly becoming standard equipment in cloud computing and data center management. The reason is that GPUs benefit from so-called parallel computing in that they can perform multiple, complex mathematical calculations rather quickly. That makes them perfect for A.I. and other data center applications. And NVDA has benefited tremendously.
Datacenter revenue jumped 52% year-over-year from 2018 to the fiscal-year 2019 for NVIDIA. That’s very strong growth and its only poised to continue rising as firm’s take advantage of the chip makers lighting fast GPU processers. And its recent buyout of Mellanox Technologies (NASDAQ:MLNX) only adds to this. MLNX specializes in chips, networking gear, and interconnects that speed up the exchange of data. These are also all major components in cloud computing. Given their already standing partnership, the buyout now gives NVDA an all-in-one play on powering cloud computing.
Meanwhile, the tech wreck of last year still has NVDA trading for a forward P/E of just 25. That’s not super expensive, given its long-term runway for growth.
There’s a good chance you’ve never heard of Xilinx (NASDAQXLNX). But the firm could overthrow NVDA as the king of the semiconductor stocks over the long haul. That’s because of the type of chip it specializes in.
XLNX makes something called a field programmable gate arrays (FPGAs) and various forms of the semiconductor. The beauty of FPGAs is that their logic programming can be changed continuously. This means that they can adapt to changing requirements and are perfect for machine learning/artificial intelligence. That’s a huge advantage over GPUs.
The firm has seen plenty of robust revenues — with sales growing by 34% year-over-year in the last reported quarter — as more data center and device manufacturers look towards FPGAs. That in of itself is the reason to consider the semiconductor stock.
The other is that, right now, XLNX is only one of two — the other is Intel (NASDAQ:INTC) — producers of FPGA chipsets. For Xilinx, this is where it gets interesting. INTC had to buy its way into the market for these chips and spent a pretty penny to do so. As the only other player in the market — and a pure player at that — anyone else looking to do so, will have to snag XLNX. A couple more quarters of rising revenues and real buyout premium will exist.
Cypress Semiconductor (CY)
Those chip stocks that have been able to make some big moves and tilt towards hot trends have been rewarded by investors. That includes Cypress Semiconductor (NASDAQ:CY). Once the king of NAND Flash and other memory chips, CY has continued to pivot towards two very big trends. That would be the Internet of Things (IoT) and self-driving cars.
For starters, CY has become an automotive giant with the firm’s company’s portfolio consisting of micro-controllers, semiconductors for wireless connectivity, USB-C chips and touchscreen controllers. However, the bell of the ball could be its specialized computer memory called NOR flash. According to Cypress, NOR Flash chips offer high performance and are fail-safe storage systems. That sort of need is critical when you have a computer making decisions such as driving a car for you. Already, about half of all automatic driving systems use NOR Flash to function. With driverless car demand/growth assured, CY should be able to profit from this trend. Already, it controls 68% of NOR Flash market.
Secondly, Cypress is dominating IoT. The firm’s programmable SoC (PSoC) chips offer advantages in power consumption, security and programmability over other rivals IoT offerings. Meanwhile, CY sells plenty of wireless/Bluetooth controllers needed to connect devices to the internet. As a result, the firm has seen its IoT revenues surge more than 39% over the last two years.
With these two tailwinds propelling it along, Cypress could be the semiconductor stock to beat.
ON Semiconductor (ON)
Like CY, ON Semiconductor (NASDAQ:ON) is making its turnaround work. Historically, ON was a maker of strictly low-margined, high-comedized memory chips. That was fine, but memory chips aren’t exactly a booming business. To counteract its low growth state, ON’s management decided to move into higher-margined chips. Starting in 2016, the semiconductor firm made some strategic moves — including a big buyout — to enter new markets. That includes automotive power management and high-tech sensor market.
New end-users in medicine, lighting and industrial IoT have managed to boost revenues and profits at ON. ON recorded more than $5.9 billion in revenue last year. That’s a 51% jump in sales over what it made in 2016. Moreover, profits have more than doubled as these newer chips come with higher margins.
Clearly, ON’s turnaround and newfound focus is working. And with demand for advanced chips in automobiles, equipment and power management solutions in data centers only growing, the firm has long runway for future revenue growth. Management is calling for the stock to pull in around $7.1 billion in sales by 2020.
However, shares of ON can be had for a dirt-cheap P/E of just 14. That makes ON one of the biggest values among the semiconductor stocks.
ASML Holding (ASML)
ASML Holding’s (NASDAQ:ASML) is a bit different than the other semiconductor stocks on this list. That’s because it doesn’t actually make chips itself, but makes the machines that enable other firms to make chips. But the key is that ASML’s technology is what has allowed many semiconductor stocks to really apply Moore’s Law and shrink chips to fit more computing power into the same space or less.
ASML lithography tools are needed to apply serious scale to cutting-edge chips. The best part is that ASML is only provider of EUV lithography — a very specialized version of these machines. Each of these machines cost more than $100 million and absolutely necessary for all the firms on this list need it to make their potential happen. With demand surging for all sorts of specialized semis, ASML expects to sell nearly 70% more of these machines this year.
With such a wide moat, rising sales and plenty of profits, ASML is one of the most shareholder-friendly semiconductor stocks out there. Last year alone, ASML managed to increase its payout by 50%. Over the last five years, that payout has grown by over 200%. Meanwhile, ASML has conducted several lucrative buyback programs.
With demand rising for a variety of technologically advanced chips, ASML will be in the driver’s seat for a long time. Investors could consider it the safer backdoor play in the sector.
Disclosure: At the time of writing, Aaron Levitt did not have a position in any stock mentioned.