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5 Top Semiconductor Fab Stocks to Invest in During the Global Chip Shortage

By Nicholas Rossolillo - Apr 2, 2021 at 7:52AM

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It's a good time to be in the chip-manufacturing business.

Lingering aftereffects of the U.S.-China trade war, the COVID-19 pandemic, extreme winter weather in Texas, and a surge in demand for all things digital have combined to cause a global shortage of semiconductors. Lack of chip supply has throttled the production of everything from smartphones to cars and trucks. With demand high and fabrication plants scrambling to catch up, this is a good time to be in the chip-manufacturing business.

5 top semiconductor fab stocks

Top names in the semiconductor fabrication industry include Intel ( INTC 3.53% ), Samsung, and privately owned GlobalFoundries. But some other lesser-known names in chip manufacturing could be timely additions to your investment portfolio given the current constraints on supply. Here's a list of the top chip fab stocks.

Company

Market Cap

TTM Revenue

TTM P/E Ratio

Taiwan Semiconductor Manufacturing ( TSM -0.16% )

$612 billion

$45.6 billion

35

Texas Instruments ( TXN 0.64% )

$175 billion

$14.5 billion

32

Micron Technology ( MU 1.02% )

$99 billion

$23.5 billion

32

Analog Devices ( ADI 0.15% )

$57 billion

$5.9 billion

41

NXP Semiconductors ( NXPI -1.25% )

$55 billion

$8.6 billion

1,342

Data sources: YCharts and company investor relations websites. TTM = trailing-12-months. P/E = Price-to-earnings. 

Let's find out a bit more about each of these semiconductor fabricators.

1. Taiwan Semiconductor Manufacturing

Though it may not be the household name that Intel is, Taiwan Semiconductor is actually far and away the world's largest semiconductor company as measured by market capitalization. And as far as revenue goes, this foundry giant has taken the crown away from Intel in chip fabrication in recent years. (However, Intel also makes money on engineering and design.) TSM currently claims a 57% market share in the global chip fab industry.  

Its advanced manufacturing technology has been key to its success. Its 5-nanometer chip production (the smallest, most power-efficient, and powerful computing processors around) puts it way ahead of its peers. As a result, nearly all fabless semiconductor companies around the globe have turned to TSMC as a trusted production partner. Even Intel has, as it has struggled with the rollout of some of its new manufacturing lines. From chips that power 5G mobile networks to those that underpin artificial intelligence systems, TSMC can handle the production job. 

The company just announced that it plans to spend $100 billion over the next three years to increase its production capacity. This is because the company hasn’t been able to keep up with demand over the past year despite running its fabrication plants at over 100% utilization.

TSMC continues to pay a dividend that currently yields 1.5% a year. If there's a profit to be turned from chip manufacturing operating at max capacity for the foreseeable future, investors in TSMC can be sure they'll reap some of it.

Someone in a lab suit holding a semiconductor.

Image source: Getty Images.

2. Texas Instruments

Texas Instruments designs and manufactures chips used in a wide variety of applications, from advanced driver assist systems (ADAS) in cars to microcontrollers for the aerospace and defense industries. It isn't the fastest-growing company in its sector. But TI is a critical supplier in the global economy and has been expanding at a steady pace for decades as electronic components grow increasingly important in all sorts of devices.  

The semiconductor industry can be highly cyclical. Years featuring surging unmet demand (like 2021) can be followed by lean ones as supply ramps up to meet global needs and then exceeds them. But TI has been a consistent winner throughout these cycles by efficiently allocating resources to improve its manufacturing processes. The company averaged 12% growth in free cash flow annually from 2004 to 2020, and it has increased its dividend payout every year along the way. In fact, shares currently yield 2.2% a year right now, making this one of the best chip stocks there is for investors seeking both steady growth and reliable income.

3. Micron Technology

Unlike the previous two chip fabs mentioned, which produce a diverse array of chip types, Micron is laser-focused on digital memory. Memory chips are a tech staple, showing up everywhere -- in more complex semiconductor designs, in data centers, and as stand-alone parts in consumer electronics. Historically, their prices have been prone to wild swings due to fluctuations in supply and demand. But digital memory is more important than ever before, and Micron weathered the last downturn (which culminated in 2020), emerged even stronger than it was before, and is returning to rapid profitable growth.  

That's because technologies like artificial intelligence, data centers, cloud computing services, 5G mobility and smartphones, cars with ADAS and electric powertrains, and robotic industrial equipment all require massive amounts of data. That demands places to store all that information. Micron is constantly investing in tech to shrink the size of its memory chips while simultaneously increasing the chips' storage capacity. And as it does so, its profit margins are improving. The company expects demand to stay high in 2021 and beyond as more applications require its memory components to function.

4. Analog Devices

Analog Devices is another well-diversified designer and manufacturer of chips, similar to Texas Instruments. The company makes everything from processors to network connectivity chips to silicon designed for more specific applications like LiDAR or 5G mobility. Its top end-markets include industrials, communications, and the automotive industry.  

Analog Devices is also driving important technological trends. Its chips are lowering power consumption in industrial equipment and manufacturing industries, wireless connectivity, and battery-powered vehicles and energy storage. It's highly profitable too. It has plenty of cash (free cash flow profit margin was an impressive 33% in Q1) to invest in new designs and improve its fab processes. Its dividend currently yields 1.8%, and business is growing fast during the current global chip shortage.

5. NXP Semiconductor

Rounding out the top five is NXP Semiconductor, a leader in the design and manufacture of connectivity chips and processors for autos, smartphones, and industrial equipment. Last year was a bad one for automakers, but even with car and truck sales down sharply during the earlier phases of the pandemic, 40% of NXP's revenue was derived from that industry. Besides connectivity, it also has a hand in vehicles' ADAS hardware, infotainment systems, and electric drivetrain technology.  

This makes NXP a top buy for investors looking to bet on a rebound in the auto industry -- not to mention the development of autonomous and electric vehicles. Adverse weather temporarily shuttered some of NXP's plants in Texas early this year, but the company is rapidly recovering from the effects of the pandemic and ramping up production. Profitability is recovering as well as a result. NXP was recently added to the S&P 500 index, reinforcing this chip company's growing prospects as a top fab of electronic components.

A word of caution

Chip fabrication companies stand to make a lot of money during the global chip shortage. High demand means high pricing on hardware sold -- and record profitability to boot. But the  semiconductor business is a cyclical affair. Eventually, supply will catch up with demand and sales and profits will moderate. This can be expected to lead to some wild swings in stock prices.

Nevertheless, the chip shortage underscores the importance of these basic building blocks of tech. If you invest, avoid building too large a position out of a fear of missing out, and instead stay focused on the long term (at least a few years, but the longer the better). Semiconductors are enjoying a secular growth trend that has lasted for decades now, and that trend is poised to continue in the decade ahead.

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.

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Stocks Mentioned

Taiwan Semiconductor Manufacturing Company Limited Stock Quote
Taiwan Semiconductor Manufacturing Company Limited
TSM
$119.14 (-0.16%) $0.19
Texas Instruments Incorporated Stock Quote
Texas Instruments Incorporated
TXN
$194.61 (0.64%) $1.23
Intel Corporation Stock Quote
Intel Corporation
INTC
$50.99 (3.53%) $1.74
Micron Technology, Inc. Stock Quote
Micron Technology, Inc.
MU
$82.45 (1.02%) $0.83
NXP Semiconductors N.V. Stock Quote
NXP Semiconductors N.V.
NXPI
$224.28 (-1.25%) $-2.84
Analog Devices, Inc. Stock Quote
Analog Devices, Inc.
ADI
$181.06 (0.15%) $0.27

*Average returns of all recommendations since inception. Cost basis and return based on previous market day close.

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