If you're eager to invest in the semiconductor industry, you have plenty of reason. Semiconductors are in myriad things we use every day -- including our smartphones, cars, and even toothbrushes.
Plus, the industry is expected to grow at a solid clip in the years to come. Estimates differ, of course, but per the folks at Allied Market Research, the semiconductor market is expected to nearly double in size between 2021 and 2031, reaching $1 billion. The Semiconductor Industry Association recently reported January 2024 global semiconductor industry sales up 15% year over year.
The most appealing semiconductor stock, arguably, is Nvidia, in large part due to its torrid recent growth. It's up an eye-popping 19,000% over the past decade, averaging annual gains of 69%. For context, the S&P 500 averaged gains of nearly 12% in that same period. According to some analysts, though, Nvidia shares may have gotten ahead of themselves and may be due to fall in price.
If you agree, you're not out of luck. There are other semiconductor stocks out there with seemingly more appealing valuations. Here are three to consider -- plus a bonus idea.
1. Skyworks Solutions
Skyworks Solutions(NASDAQ: SWKS), with a recent market value approaching $15 billion, is focused on wireless networking technology, with customers including Amazon, Apple, Alphabet, Broadcom, Samsung and many other big names. In all, it boasts more than 8,000 customers, roughly 4,900 patents, and fiscal 2023 operating cash flow up 30% year over year.
Shares recently dipped after the company posted solid second-quarter results but warned of weakness in the mobile arena that could depress operations for a while. This may not be welcome news, but the stock can deliver a more attractive entry price for those who want to own it long term and who anticipate a mobile recovery and long-term growth.
One tailwind for Skyworks Solutions may be the proliferation of artificial-intelligence-enabled smartphones.
2. Infineon Technologies
Infineon Technologies (OTC: IFNNY) is a Germany-based semiconductor company, recently valued at about $52 billion, and focused on industrial and automotive chips. The automotive chips niche is clearly one that should grow over time as more vehicles are produced with electric powertrains and myriad sensors are used for various smart-car and safety features.
Infineon's recently reported second-quarter results reflected "prolonged weak demand in major target markets," with revenue down 12% year over year and adjusted earnings per share down 39%. Free cash flow improved, though, at 82 million euros, up from a loss of 1.6 billion euros the year before. And Infineon is focusing on its cost structure in order to boost its competitiveness.
Not surprisingly, Infineon's shares have been in a slump for much of the year. That reflects an opportunity for long-term investors. The depressed price has also pushed up the stock's dividend yield to a recent 1%. (The dividend was upped by 14% last year.)
3. STMicroelectronics
STMicroelectronics (NYSE: STM), based in Geneva and with a recent market value near $36 billion, employs more than 50,000 people, more than 9,500 of whom work in research and development (R&D), boding well for future new and improved offerings. (The company boasts some 20,000 patents as well.) It's another major supplier of automotive chips, among other chips, with ample growth ahead.
Whereas many chipmakers simply design chips to be built by others, STMicroelectronics notes that "we believe in the benefits of owning manufacturing facilities and operating them in close proximity and coordination with R&D operations." That kind of vertical integration is likely to give the company an edge over some rivals.
Bonus idea: The VanEck Semiconductor ETF
The stocks above, while not necessarily screaming bargains, seem appealingly valued, with much lower price-to-sales ratios and forward-looking price-to-earnings ratios than Nvidia. You might invest in any that interest you, especially if you aim to hang on for many years, or you might dollar-cost average into them, buying shares in installments over time. You might do the same with Nvidia shares, too, as they seem poised to perform well over the long term even if their near-term growth may not be rapid.
Here's another idea: Consider a semiconductor exchange-traded fund (ETF) instead that will quickly distribute your dollars across many stocks in the industry. A fine candidate is the VanEck Semiconductor ETF (NASDAQ: SMH), which encompasses Nvidia and about 24 other companies. It's been a strong performer, averaging annual gains of 27% over the past decade and charging a reasonable expense ratio (annual fee) of 0.35%.
However you go about it, semiconductor stocks are very promising in general. Just aim to buy them when they seem reasonably valued, or, better yet, undervalued. And then keep up with their progress, as it's a dynamic industry.
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Suzanne Frey, an executive at Alphabet, is a member of The Motley Fool's board of directors. John Mackey, former CEO of Whole Foods Market, an Amazon subsidiary, is a member of The Motley Fool's board of directors. Selena Maranjian has positions in Alphabet, Amazon, Apple, and Nvidia. The Motley Fool has positions in and recommends Alphabet, Amazon, Apple, and Nvidia. The Motley Fool recommends Broadcom and Skyworks Solutions. The Motley Fool has a disclosure policy.
