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3 Top Chip Stocks to Buy in 2022 to Ride the EV Megatrend

By Nicholas Rossolillo – Dec 28, 2021 at 11:12AM

Key Points

  • NXP is a semiconductor firm heavily focused on the auto industry.
  • Micron's memory chips are seeing increasing demand in modern vehicles.
  • Texas Instruments supplies all sorts of parts to EV makers.

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These auto suppliers could have the most to gain from the growing electric vehicle market.

Dozens of new electric vehicle models will hit showroom floors in the next few years. With millions of these vehicles sold every year around the globe, it's no wonder lots of start-ups in the industry have gone public recently to try and capitalize on this massive opportunity. However, the harsh reality is few of these new EV automakers will pay off for shareholders. 

Suppliers are a different story, though. Chips and related circuitry are gobbling up a bigger share of the inputs required to produce a modern vehicle. Three such suppliers that look like buys headed into 2022 are NXP Semiconductors (NXPI 1.50%), Micron Technology (MU -0.73%), and Texas Instruments (TXN 1.25%).

Someone sitting in a car taking the keys from someone pictured off screen.

Image source: Getty Images.

NXP: Highly concentrated on supplying auto technology

Chips are basic building blocks for all things technology, and they have proliferated throughout every sector of the economy. As a result, most semiconductor firms are highly diversified when it comes to the end markets they serve. But NXP is a rare gem -- just over half of its sales have been going to the automotive industry this year, making it a top stock to consider if you want to play the EV secular growth trend without buying shares of EV start-ups. 

NXP has a broad portfolio of solutions available to automakers. From actual battery management and powertrain parts to infotainment to advanced driver assist (ADAS) hardware, this company has it covered. That's significant, because as automakers adopt all-new battery-powered drivetrains, there's room to start upping the game in other related tech areas too. So when NXP lands a deal for one part of a vehicle, it has the opportunity to cross-sell its portfolio on other fronts as well. 

That all adds up to a highly efficient hardware design and chip manufacturing operation. To wit, in the third quarter, NXP's revenue jumped 26% year over year to $2.86 billion, but adjusted operating profit grew at an even faster 64% rate to $959 million. That leaves plenty of room for NXP to continue spending on research and development, as well as invest in future supply needs, as cars are gobbling up silicon at a record pace right now. 

As for the current supply chain crunch, even if global vehicle sales are flat in 2022 because of limited inventory, NXP can continue to grow at a double-digit pace thanks to the increasing amount of tech that goes into each new model year. With this trend expected to continue throughout the decade (some estimates point to tech accounting for 50% of the cost to produce a car by 2030), NXP will play a prominent role in the EV movement. Trading at just 25 times trailing 12-month free cash flow, the stock looks like a reasonable value headed into the new year.

Micron: Digital memory in high demand

Digital memory chip firm Micron has had a tenuous relationship with shareholders throughout its history. Memory chips -- a basic commodity and a key ingredient in more advanced semiconductor designs and computing systems -- are one of the most cyclical segments of the semiconductor industry. Even small changes in supply and demand affect pricing, which can send Micron's profits soaring or crashing. 

2021 got off to a hot start as the global chip shortage currently has pricing on the high end of the spectrum, which is putting Micron's sales and profitability on track for a possible new record. But after the stock reached its latest high-water mark early in the year, worry mounted that the next cyclical downturn for digital memory could be coming. Micron just shot down that notion, potentially putting it off until 2023.

During the company's last earnings call, management said the company is well supplied to meet demand in the year ahead, keeping Micron on track to reach record sales numbers in fiscal 2022. As a result, profitability is surging (adjusted earnings per share were up 177% in the fiscal 2022 first quarter, and they're forecast to double again in the second quarter). For the time being, at least, Micron stock looks like an underrated buy as Wall Street reassesses the company's lucrative prospects for the next year.

But what does this have to do with EVs? Memory is a key ingredient in battery and drivetrain technology, as well as the infotainment, connectivity, and other mission-critical functions of today's modern car. Paired with other growth drivers like cloud computing and AI (which are also aiding in the development of advanced vehicle features), Micron is a top auto tech supplier to keep an eye on right now. 

Texas Instruments: An industry bellwether poised for steady growth

If Micron represents one of the more volatile stocks in the chip world, Texas Instruments is the counter to it. The old technologist is a slow-and-steady designer of digital and analog equipment for the industrial sector, and it's a highly efficient manufacturing firm to boot. 

TI produces all sorts of hardware needed in computing systems and electronics. The company doesn't provide a specific breakdown of sales, but the automotive industry is a top purchaser. TI provides components for EVs and hybrid cars in areas like battery management, charging, transmission, and power-steering parts. Paired with its digital chips, these analog parts (chips that interacts with real-world inputs) make TI a top way to play the technological advance of vehicles.

Of course, as an old industry incumbent, this is no high-growth stock, but what TI lacks in all-out expansion, it more than makes up for in profit gains and the return of excess cash to shareholders via dividends and share repurchases. This has been a steady market-beating winner over the last decade. The stock touts an impressive total return of 714% over the last 10 years, double the total return for the S&P 500. 

With automotive and industrial technology in high gear right now, TI looks like a fantastic buy for 2022 and beyond, trading for 25 times trailing 12-month free cash flow as of this writing. As more consumers purchase EVs in the years ahead, Texas Instruments will find plenty of new outlets for its broad portfolio of electronic components.

Nicholas Rossolillo and his clients own Micron Technology. The Motley Fool owns and recommends Texas Instruments. The Motley Fool recommends NXP Semiconductors. The Motley Fool has a disclosure policy.

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