Semiconductors power a wide range of devices, including PCs, gaming consoles, phones, cars, and industrial machines, and many of those platforms require a growing number of chips with every upgrade.
Those upgrades, which strengthen devices' processing power or wireless connectivity, are currently causing a global chip shortage that could persist throughout the rest of 2021.
The global semiconductor market could then grow at a compound annual growth rate of 10% between 2021 and 2026, according to research firm EMR. That stable demand suggests most investors should own at least a few chip stocks -- but the complex market can be daunting for newcomers.
So today I'll walk you through four of the world's most important chipmaking companies, and highlight why they could be great investments for the next decade.
1. Taiwan Semiconductor Manufacturing
In the past, many chipmakers manufactured their chips with their own fabrication plants, also known as fabs or foundries. But it became increasingly expensive and difficult to manufacture smaller and more powerful chips, which are measured in nanometers, and many chipmakers eventually adopted a "fabless" model by outsourcing the manufacturing process to a third-party foundry.
Today, only three foundries -- Taiwan Semiconductor Manufacturing (NYSE:TSM), Samsung, and Intel -- can manufacture the world's smallest chips. TSMC is the largest and most technologically advanced of the three, and fabless chipmakers like AMD, NVIDIA (NASDAQ:NVDA), Qualcomm (NASDAQ:QCOM), and Apple (NASDAQ:AAPL) all rely on its plants to produce their newest 5nm and 7nm chips.
TSMC's revenue and earnings rose 25% and 50%, respectively, last year as those orders flooded in. Analysts expect its revenue and earnings to grow 20% and 17%, respectively, this year, even as it boosts its capex by up to 63% to maintain its lead in the "process race" to create ever-smaller chips.
2. ASML Holding
TSMC might be the world's most important contract chipmaker, but it can't manufacture its chips without ASML Holding's (NASDAQ:ASML) lithography machines, which print circuit patterns onto wafers.
The Dutch company controls about 90% of this market, and its newest EUV (extreme ultraviolet) lithography systems are used to manufacture 5nm and 7nm chips. Its largest customer is TSMC, so it should directly benefit from the latter's rising capex over the next decade.
ASML will launch even more advanced EUV systems, called high-NA systems, over the next few years to manufacture 3nm and 2nm chips between 2022 and 2025. That roadmap directly aligns with TSMC's, and it will enable ASML to remain one of the industry's most important equipment makers for the foreseeable future.
ASML's revenue and earnings rose 18% and 38%, respectively, last year. Analysts expect its revenue and earnings to grow another 32% and 41%, respectively, this year as it profits from surging demand for new chips.
NVIDIA (NASDAQ:NVDA) is the world's largest producer of discrete GPUs. GPUs are often associated with gaming, but they're also used to mine cryptocurrencies and process machine learning tasks in data centers.
But that's not all. NVIDIA also plans to buy Arm Holdings from Softbank, which provides the chip designs for most of the world's mobile chips. If the deal is approved, NVIDIA will receive royalties and licensing fees from every producer of Arm-based chips worldwide -- including Apple, Qualcomm, MediaTek, and Huawei.
NVIDIA's revenue and adjusted earnings rose 53% and 73%, respectively, last year as sales of its gaming and data center chips surged. Wall Street analysts expect NVIDIA's revenue and earnings to rise another 33% and 34%, respectively, this year as it continues to profit from those secular tailwinds.
Those estimates could also be too low if its proposed takeover of Arm, which still faces a lot of regulatory challenges, is approved ahead of schedule. Regardless of what happens, demand for NVIDIA's GPUs should continue rising as games become more graphically demanding and AI tasks grow more complex.
Last but not least, Qualcomm is an evergreen chipmaker for two simple reasons. First, it's the world's largest mobile chipmaker by a wide margin. Its Snapdragon SoCs (system on chips) unite Arm-based CPUs, GPUs, and baseband modems into cost-effective bundles for smartphone makers.
Second, Qualcomm owns the world's largest portfolio of wireless patents, which entitles it a cut of every smartphone sold worldwide. Its dominance of both the mobile chip and licensing markets made it a popular target for antitrust regulators in the past, but it's resolved most of those issues and remains well-poised to profit from the growth of the 5G market.
Qualcomm's revenue and adjusted earnings grew 12% and 18%, respectively, last year. Those growth rates were stable, but analysts expect its revenue and earnings to surge 43% and 74%, respectively, this year as smartphone makers sell more 5G devices. It also expects the expansion of other markets, including auto telematics chips, to complement that growth.
The bottom line
The semiconductor market might seem confusing at first, but it becomes easier to understand once you break apart the pieces. TSML, ASML, NVIDIA, and Qualcomm are all solid starter stocks in this sector, and they should all continue to rise over the next decade amid soaring demand for more powerful chips.