2 Chip Stocks Worth a Look

In another sign that the economy is slowly improving, experts are predicting that worldwide semiconductor sales will grow nicely in 2010 and continue modest growth through 2012. If you're looking for exposure to the sector, I've got a couple of ideas for you.

First, the details: The Semiconductor Industry Association updated a previous forecast and now sees a 28.4% growth in chip sales this year, followed by 6.3% growth in 2011 and 2.9% in 2012. "Healthy demand in all major product sectors and in all geographic markets" has contributed to the growth thus far, and the SIA sees emerging markets -- led by China and India -- powering demand for the next couple of years.

Where should you be looking for ideas in the sector? Chip maker Intel (Nasdaq: INTC  ) is the perennial quality play. I do expect it to continue to be pushed by Advanced Micro Devices (NYSE: AMD  ) in the PC market and Qualcomm (Nasdaq: QCOM  ) , NVIDIA (Nasdaq: NVDA  ) , and other ARM Holdings (Nasdaq: ARMH  ) -based chips in the mobile device market, but Intel is my long-term choice.

The $115 billion tech bellwether reported outstanding first-quarter results in April that were helped by strong PC and notebook sales, and our Inside Value team sees the results as "a possible indicator that IT managers and consumers alike believe it's finally OK to spend on technology again." Mark your calendar for Intel's second-quarter results on July 13 and we'll see if the trend continues.

Another play in this sector is with the companies that make the equipment the chip manufacturers have to use. One of the top possibilities here is FormFactor (Nasdaq: FORM  ) , which makes probe cards that provide one of the most efficient ways to test chips. This $560 million small cap carries a lot more risk than Intel and has lost nearly 50% of its value over the past year. But a leadership change, compelling valuation, and potential upside make it a "Buy First" stock in our Motley Fool Hidden Gems service.

With the inventory glut behind us, the semiconductor industry is finally emerging from its "nuclear winter." It's time to put on the shorts and sunglasses and get out the chips!

Fool analyst Rex Moore had chips for breakfast. He owns no companies mentioned here. Intel is a Motley Fool Inside Valueselection, NVIDIA is a Stock Advisor pick, and FormFactor is a Motley Fool Hidden Gems selection. The Fool has created a covered strangle position on Intel. Motley Fool Options has recommended a bull call spread position on FormFactor. Motley Fool Options has recommended buying calls on Intel. The Fool owns shares of FormFactor. The Motley Fool has a disclosure policy.

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  • Report this Comment On June 12, 2010, at 12:35 AM, memoandstitch wrote:

    I'm clueless about FORM. Can anybody explain why its gross margin in the last earning report was so horrible?

  • Report this Comment On June 12, 2010, at 10:34 PM, only1ferret wrote:

    Don't mess with FORM, its a loser. The board just ousted the ceo and cfo. They've wasted millions moving operations to singapore, margins will only get worse because of it.

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