I was recently reading an article about the 10 biggest semiconductor news stories of the past year, and that had me thinking about semiconductor stocks.
The article started out by asserting that 2021 was the year that the world gained a greater appreciation for semiconductors’ role in modern society. Of course the importance of semiconductors has long been grasped by business and industry.
But it was the shortage that really drove home the idea to people of all backgrounds. Consumers arguably felt the effects in the automotive sector where prices surged. In fact, the average price of a new car exceeded $47,000 recently. That’s an all-time high. And that is but one example of the semiconductor shortage affecting our lives.
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Semiconductor stocks saw big changes as well. There were many deals occurring that promise to shake up the landscape. Companies of all sizes and stripes are vying to better compete in a market projected to grow 8.8% in 2022 and reach $601.5 billion in revenues.
That means semiconductor stocks will rise and fall and there will be deals to be had. Let’s look at the ones to consider purchasing as the deals continue.
- Nvidia (NASDAQ:NVDA)
- Advanced Micro Devices (NASDAQ:AMD)
- Micron Technology (NASDAQ:MU)
- Intel (NASDAQ:INTC)
- ASML Holdings (NASDAQ:ASML)
- Applied Materials (NASDAQ:AMAT)
- On Semiconductor (NASDAQ:ON)
Semiconductor Stocks to Buy: Nvidia (NVDA)
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In early February, Nvidia scrapped its plans to purchase chip design firm Arm. Nvidia struck a $40 billion deal back in September of 2020 to buy the U.K.-based chipmaker. It was slated to be the biggest deal ever in the chip industry. However, regulatory hurdles quickly cropped up.
Competitors and regulatory bodies raised concerns that it would give Nvidia unfair advantages and control over technology its competitors utilize in making their own chips.
Arm, owned by SoftBank (OTCMKTS:SFTBY) will be taken public, likely before April of next year when ARM’s fiscal year ends. SoftBank had planned to take Arm public prior to striking the now defunct deal to sell to Nvidia.
So why should investors buy NVDA stock given the failure of the Arm deal? The answer is that it remains one of the best stocks with or without Arm under its company umbrella. Nvidia provided investors with another very strong quarter of earnings. The $7.64 billion in revenues topped the $7.42 billion Wall Street expected and EPS figures similarly outstripped guidance.
The company also projects it will see $8.1 billion in revenues in the coming quarter. Wall Street expects $7.3 billion, signaling Nvidia’s confidence.
Advanced Micro Devices (AMD)
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On Feb. 14, AMD released an investor presentation indicating that it had acquired Xilinx. The market reaction to the news was more muted than might have been expected, but the news remains positive.
AMD has been pursuing the deal for quite some time. It was fraught with regulatory push back in China, where Xilinx is based. Ultimately the deal succeeded. It gives AMD new expertise in two areas of semiconductor technology it lacked before. Xilinx provides system on chip (SOC) and field programmable gate array (FPGA) leadership.
Ultimately it ups AMD’s ability to pursue greater revenues. As noted in the corporate presentation, AMD can now address a $135 billion market following the acquisition. That presentation specifically points to opportunities in data center, 5G and embedded areas where the two companies have complementary expertise.
AMD also looks strong from a financial fundamental perspective as it exceeded analyst expectations with its recent earnings report. The $4.8 billion in revenues it posted bested the $4.5 billion expected. EPS figures reached 92 cents where 76 cents were expected. On top of that, AMD gave guidance for the upcoming quarter of $5 billion. That’s 45% higher than the same period a year earlier.
Micron Technology (MU)
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Micron isn’t particularly connected to any of the deals shaking up the semiconductor industry. But it is an important firm worth watching and a stock worth buying. That’s because the memory chip firm is likely to continue to see strong demand.
But at the same time, Micron’s image may scare some investors away. The company has historically been more vulnerable to the cyclicality that the semiconductor industry is known for.
That’s because it provides less specialized memory chips with lower barriers to entry. As demand peaks and inventory begins to pile up it is the less specialized chips that suffer fastest.
However, demand for its memory chips does not look to be waning anytime soon. Digitization of everything is driving demand for memory chips. New Street Research believes that demand will continue to ramp up and recently initiated coverage of Micron giving it a buy rating and a $135 target price.
New Street Research analyst Pierre Ferragu believes “Micron benefits from strong secular growth and will benefit over the years from improving profitability in NAND, which represent a material long-term compounding factor, and for which there is consolidation potential upside.”
Semiconductor Stocks to Buy: Intel (INTC)
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Pat Gelsinger has been the CEO of Intel for just over a year. On his second day of the job he addressed a letter to his employees with his vision for the firm. He believes cloud, mobility fueled by 5G, artificial intelligence and the artificial edge are the focal points for Intel to address under his tenure. He also stated that Intel is the only firm in the world with the depth and breadth of expertise to capitalize on those opportunities.
Based on Intel’s recent acquisition of Israeli-based Tower Semiconductor that means foundry will be a focal area for achieving those priorities. Intel acquired the firm specifically for its Intel Foundry Service business. It is also investing $20 to expand its Arizona manufacturing facilities and another $20 billion to build what it says will be the “largest silicon manufacturing location on the planet.”
Intel is building a geographically diverse set of fab operations spanning the globe and under Gelsinger its future is looking much brighter.
ASML Holdings (ASML)
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ASML Holdings isn’t explicitly connected to any recent acquisitions moving the semiconductor industry. But it is a vitally important firm in the global semiconductor industry. That’s because the firm is a critical supplier of the equipment used to manufacture chips. It produces lithography machines which are systems used to make chips.
These machines account for the highest capital expenditures of semiconductor manufacturing firms. On Jan. 19, a story noted that Intel placed an order with ASML for one such machine costing $340 million. Consider that a cutting edge plant requires approximately a dozen of ASML’s $150 million lithography machines. And then consider that ASML has a near monopoly as its technology isn’t easily replicable. Investors can then see why ASML stock is highly regarded.
ASML stock maintains an overweight rating and massive upside potential. It currently trades for $650 with average target prices at $930.
Applied Materials (AMAT)
Applied Materials is another semiconductor firm that specializes in equipment. It’s also a firm that is performing exceptionally well. It has almost become cliche at this point, but Applied Materials exceeded both revenue and EPS expectations.
Revenues increased by 27% which meant that AMAT stock reported $6.27 billion of sales in the quarter when $6.19 were expected. That translated to EPS figures that outstripped guidance as well.
CEO Gary Dickerson doesn’t expect things to slow down anytime soon: “Our outlook for 2022 and beyond is very positive as long-term secular trends drive our markets structurally higher and Applied’s broad technology portfolio puts us in a great position to capture a larger portion of our served markets.”
Applied Materials is worth purchasing for the same reasons that ASML Holdings is: It is one of few companies on the planet that can do what it does. Demand is high and it doesn’t look to be slowing.
Semiconductor Stocks to Buy: ON Semiconductor (ON)
For investors looking to capitalize on surging automotive prices ON stock might be just the stock to consider. The company exceeded expectations which CEO Hassane El-Khoury attributed to high automotive and industrial end market demand.
That said, ON stock still has plenty of upside remaining based on target prices. It currently trades near $60 but has a consensus target price of $73.81 and a high price target of $90.
The company’s strong quarter emboldened it to strike out and project higher forward earnings than Wall Street gave. ON Semiconductor expects between $1.74 and $1.84 billion in sales while Wall Street is looking for $1.72 billion.
On the date of publication, Alex Sirois did not have (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.
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