What happened

Shares of ASML Holdings (NASDAQ:ASML), Applied Materials (NASDAQ:AMAT), and Micron Technologies (NASDAQ:MU) appreciated 64.8%, 41.4%, and 39.8%, respectively, in 2020, according to data provided by S&P Global Market Intelligence.

MU 1 Year Price Returns (Daily) Chart

MU 1 Year Price Returns (Daily) data by YCharts

The common thread among these stocks? The cyclical upturn in semiconductors after the industry bear market of 2018 and early 2019. While COVID-19 made the cyclical upturn a bit wobbly, it didn't stop the momentum for these leading companies powering the digital revolution.

Over the shoulder view of technician looking at a processor under a magnifying glass.

2020 was a strong year for semiconductor equipment and memory stocks. Image source: Getty Images.

So what

Leading the charge was ASML Holdings. ASML sells a variety of semiconductor equipment machines that help produce leading-edge logic chips; however, its most important product is its extreme ultraviolet lithography (EUV) machine. EUV is a technology that was 20 years in the making, before it was finally cracked by ASML, which is now the sole provider of EUV technology. EUV is critical to the production of leading-edge semiconductors, as it takes several steps out of the difficult, capital-intensive process. As such, EUV has proven to be an "essential" product for the foundry industry's long-term road map, and is the most immune from the short-term buying patterns of the industry.

EUV has also turned ASML into more of a high-multiple growth stock than its more cyclical peers, so it's no wonder that it outperformed in a year when growth stocks again outperformed.

While ASML is the largest semiconductor equipment by market cap, Applied Materials is the largest semiconductor equipment company by revenue, with a broad portfolio across etch machines, deposition machines, and metrology and inspection tools.

ASML Market Cap Chart

ASML Market Cap data by YCharts

Applied also had a good year in 2020, with accelerating year-over-year growth, as its semiconductor customers ramped up their spending on 5G and AI chips for the digital economy. Applied materials serves not only foundries that produce processors, but also the memory industry, including DRAM and NAND flash, along with displays.

As the memory industry improved in 2020 and the foundry and logic industry continued its strength from 2019, Applied did rather well. However, the stock didn't really take off until after the November election, as investors seem to think the election of President-elect Joe Biden will normalize relations with China -- a key Applied customer. The announcement of a COVID-19 vaccine shortly after may have also helped, as unlike ASML, the market still views Applied as more cyclical play.

Applied Materials is actually the cheapest of the major semiconductor equipment stocks for some reason, and still trades at just 18 times next year's earnings, well below the market, despite its recent run.

Finally, Micron Technology isn't a semiconductor equipment stock, but does buy the machines sold by them, as it produces its memory chips in its owned fabs. Micron is the most cyclical of the three, as it sells commodity-like DRAM memory chips and NAND flash storage products, and has higher fixed costs.

Micron went into a deep down-cycle starting in late 2018, and just when it was seemingly coming out of the trough early this year, COVID-19 hit. That didn't affect Micron as badly as many thought, as demand from data centers and laptops during the pandemic made up for declines in mobile phones and automotive. However, the stock then took a double-dip over the summer after it was abruptly cut off from supplying memory chips to Chinese giant Huawei. Yet those concerns, too, passed, when Micron said it would be able to find other buyers for its chips within one to two quarters.

As with Applied Materials, Micron gained after Biden's election and the announcement of a COVID-19 vaccine. After a long two years of a memory bear market and pulling back on supply growth, it appears the DRAM industry, where Micron gets most of its revenue and profits, may finally be primed for a multi-year upswing.

Now what

Semiconductors did really well in 2020 after a similarly strong 2019; however, if you think the party is over, I wouldn't be too sure. The industry is coming out of a nasty downturn at the end of 2018, and the digital economy isn't going away anytime soon. Additionally, for the most part, semiconductor stocks are still much cheaper than the software segment of the technology sector. Barring a demand shock, I'd stick with these stocks in 2021 and beyond.

This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium advisory service. We’re motley! Questioning an investing thesis -- even one of our own -- helps us all think critically about investing and make decisions that help us become smarter, happier, and richer.